Reeves urged to launch tax raid on landlords (and the three ways she could do it)

Telegraph

15-05-2025

Rachel Reeves is under pressure from Labour politicians to launch a fresh tax raid on landlords, reports suggest.
Nick Williams, a former No 10 aide, on Thursday warned taxes would 'have to go up' as the Chancellor seeks to fill a fiscal black hole.
Labour MPs are said to be keen on increasing the amount landlords pay on rental income, The Times reported. The move would allow the party to escape breaking its manifesto pledge of not raising taxes on 'working people' – after Sir Keir Starmer suggested landlords did not meet the definition.
Tax experts told The Telegraph that Ms Reeves could force landlords to pay National Insurance on their rental income, introduce a separate tax band for rental income or levy VAT on residential property lettings.
But Chris Norris, of the National Residential Landlords Association (NRLA), pointed out that landlords already paid income tax on rental income. He warned further taxes would 'increase complexity, dissuade investment and risk deepening the housing crisis'.
He added: 'Rumours concerning the imposition of a 'rental income tax' are misleading as they suggest that such income is not already taxed just like all other personal and business income.'
At present, landlords do not pay National Insurance because the earnings are treated as passive income rather than from employment or self-employment. Workers meanwhile must pay 8pc of their income in National Insurance contributions.
Last year the Resolution Foundation think tank said income tax rates on rental income should be supplemented with a 'new class' of National Insurance to 'ensure more consistent tax rates across different types of income'.
Tulip Siddiq, the former City minister, has also previously called for 'unearned income' such as rent on buy-to-let properties to be taxed more in line with wages.
Telegraph Money has looked at three ways Ms Reeves could launch a raid on property investors:
Charging National Insurance on rental income
Robert Salter, of tax advisory firm, Blick Rothenberg, said one option for Ms Reeves would be to make the profit from letting income subject to National Insurance contributions in line with self-employed workers.
Self-employed National Insurance rates depend on the profit earned. Workers pay 6pc on profits earned between £12,570 and £50,270 and then 2pc on any profits above this amount. For those with profits below £6,725 a year, self-employed workers do not have to pay National Insurance but can choose to pay voluntary contributions.
However, Ian Cook, chartered financial planner at Quilter, said levying National Insurance on landlords could be too difficult to implement because workers stop paying it once they reach state pension age. For self-employed workers, they also stop paying class 4 contributions from the following April after they reach 66 years old.
The median age of individual landlords is 58 years old, according to government figures. Mr Cook said it would involve the government breaking with convention to levy National Insurance on landlords above this age or create a two-tier policy whereby some landlords were charged and others were not – both outcomes he described as 'complicated'.
Creating a new income tax band for landlords
Mr Cook said a simpler solution for Ms Reeves would be to create a separate tax rate for rental income.
The first £1,000 of rental income earned from property is tax-free. This is known as the property allowance. Tax is then charged depending on what band of income you fall into.
For example if a landlord earns £45,000 a year from their day job and earns a further £8,000 in rental income, the first £5,271 is taxed at the 20pc basic rate and the remaining £1,729 falls under 40pc higher rate.
However Mr Cook said accountants have been 'very creative in the past with how they have allocated property income for husband and wife owners '.
He said: 'Even if a property is jointly owned, you can allocate 99pc of the rental income to the person who benefits from a tax perspective. Effectively some landlords therefore don't pay any income tax because if one partner does not work, the income can fall within their personal allowance.'
Mr Cook said Labour could close off this option by introducing a separate tax band for rental income. 'This could be quite easily implemented into HM Revenue and Custom's tax system and would raise a significant amount of tax revenue for the Treasury'.
Levying VAT on residential properties
Mr Salter said another option Ms Reeves could consider is introducing VAT on residential property lettings. There is precedent for the Chancellor to do this with VAT already being applied to furnished holiday lettings and serviced accommodation.
However Mr Salter said a 20pc levy would come with significant drawbacks for renters with the cost inevitably being passed on, pushing up prices.
He said: 'Introducing VAT on regular residential property lettings would clearly result in significant rental property inflation and be a real cost which is borne by tenants.' Polling by YouGov at the last General Election found four in 10 renters voted for Sir Keir's party last summer.
Mr Salter added that while this policy would have the clearest impact on pushing up the price of rental accommodation, all of these policies suggested were not without their pitfalls and could put pressure on rental inflation as an unintended consequence.
Mr Norris, chief policy officer at the NRLA, said: 'Since 2015, landlords have faced a series of punitive tax and regulatory changes, such as the removal of mortgage interest relief and the introduction and subsequent hiking of the stamp duty levy on additional properties.
'These changes have significantly impacted investment in the private rental sector, with many landlords leaving the sector and reducing their portfolios due to financial pressure and a lack of confidence in future returns.
'With demand for rented homes at record highs and supply failing to keep up, policies that disincentivise investment will inevitably hurt tenants the most, leading to higher rents and reduced choice.'