Could landlords face National Insurance on rental income?

The Treasury is considering targeting landlords in the Autumn Budget by applying National Insurance to rental income, according to the latest rumours.

The Times reports that officials are examining proposals to hike the taxes for buy-to-let landlords in the hope of raising £2 billion in chancellor Rachel Reeves’s upcoming Budget.

The speculation follows other reports of potential property tax hikes, suggesting the Treasury is looking closely at property tax reforms as a way to balance the books.

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According to The Guardian, Reeves is considering replacing stamp duty with a national property tax on the sale of homes worth more than £500,000.

The chancellor is also said to be mulling over a mansion tax for homes by introducing a capital gains tax charge on properties that sell for more than £1.5 million.

The latest rumour of potentially hitting landlords with National Insurance is apparently an option on the table for the government as it tries to avoid breaking the “red lines” set by Reeves before the general election not to put up VAT, income tax or National Insurance.

Earnings from property, pensions and savings are largely exempt from National Insurance contributions, which are levied on employees’ wages at a rate of 8%.

Allies of Reeves told The Times that widening the scope of National Insurance so that it includes rental income would not break the red lines because it wouldn’t involve raising the rate. They likened it to putting VAT on private school fees.

How would the policy work in practice?

National Insurance is charged at 8% on employee contributions (6% for self-employed people), dropping to 2% for income and profits over £50,270.

There was £27 billion of net property income in 2022-23, according to the most recent official data. So, an extra levy of 8% on property income would have generated about £2.16 billion for the Treasury.

If the same National Insurance rates are applied to rental income, the fact that it falls to 2% on higher incomes means smaller landlords will be hit harder.

According to The Times, the most common property income bracket is £50,000 to £70,000, meaning thousands of landlords could be hit by an extra £1,057 bill per year if forced to pay National Insurance.

“Unlikely to lose the government votes – but will push more landlords to sell up”

Experts say that while a move like this may not be that unpopular – especially compared to the massive backlash the government has faced over things like the Winter Fuel Payment and inheritance tax changes – it will hit tenants as well as landlords.

Tom Bill, head of UK residential research at Knight Frank, comments: “Targeting landlords won’t lose the government many votes but such moves invariably end up hurting tenants.

“With landlords already selling up ahead of the Renters’ Rights Bill and tougher green regulations, another disincentive would reduce supply further and put upwards pressure on rents. Those that stay may pass on the extra costs in other ways. Governments need to fully appreciate that when you tax an activity, you get less of it.”

Shaun Moore, tax and financial planning expert at the wealth manager Quilter, agrees, saying that an additional tax burden “risks accelerating the exodus of landlords from the market”.

For landlords that continue to let out properties, the addition of National Insurance “would almost certainly be passed on to renters through higher rents”, according to Moore.

He adds: “We would also expect to see the increasingly popular practice of holding properties within a limited company structure skyrocket as landlords look for ways to mitigate the impact of these changes.

“Ironically, this could mean the government’s expected revenue boost is far smaller than anticipated.”

According to Marc von Grundherr, director at the estate agent Benham & Reeves, the rumoured policy “smacks of political point-scoring rather than sound housing policy”.

He comments: “Applying National Insurance to rental income threatens to undermine rental supply by squeezing small and medium-scale landlords, who may pull up stakes or restructure.”

What does the Treasury say?

The government does not comment on speculation around future changes to tax policy. This means there are often rumours flying about in the run-up to fiscal events like the Budget, which do not ever materialise and get announced.

The Treasury did not address the rumours about applying National Insurance to rental income when MoneyWeek contacted the department for comment, instead saying: “As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8 billion and cut borrowing by £3.4 billion.

“We are committed to keeping taxes for working people as low as possible, which is why at last Autumn’s Budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee National Insurance, or VAT.”