Today is Budget day, and lettings agency Hamptons – part of Connells – has set out how the imposition of National Insurance on rental income could hit the lettings sector.
Currently, landlords who own property in their personal name pay income tax on their profits, but do not pay National Insurance contributions (NICs).
The proposed reform – which is rumoured to be announced today – would change that, subjecting rental profits to NICs at a rate of 8% up to £50,270 and 2% thereafter – mirroring the treatment of employment income.
Hamptons notes that while not confirmed, it’s likely that NICs would be levied on pre-mortgage profits, which could significantly affect landlords’ bottom lines.
The agency states: “Our analysis shows that a typical landlord earning £16,478 annually in rental income and paying £7,875 in mortgage interest would see their tax bill more than double – from £699 to £1,609. A higher-rate taxpayer would see their tax bill rise from £2,973 to £3,200, leaving just £295 in profit.”
It says this change would disproportionately affect younger landlords under pension age, who are not exempt from NICs; unincorporated landlords, who make up around 80% of the buy-to-let market; and lower-income landlords, who may rely on rental income to supplement modest earnings or pensions.
Hamptons says one third third of landlords are over state pension age and would be exempt, while incorporated landlords would remain unaffected.
The agency says that while the reform would improve parity between rental and employment income, it risks further reducing the profitability of buy-to-let – particularly for those with high mortgage costs and limited equity.
It notes: “The definition of ‘profit’ is key: if NICs are applied before mortgage interest relief, it would amplify the chances of higher-rate taxpayers having to pay tax on loss-making properties.
“Unlike the removal of mortgage interest relief (Section 24), which hit higher-rate taxpayers hardest, this proposal could have a greater impact on lower-income landlords. Younger landlords, who typically have smaller equity buffers and higher mortgage costs, would be particularly exposed.”
The idea of putting National Insurance on landlord income was originally proposed by a think tank, the Resolution Foundation, at which time the reform was estimated to raise
up to £3 billion annually. However, Hamptons calculates that with around 40% of the UK’s 3.1 million landlords likely to be exempt, “our analysis suggests a more realistic figure is closer to £1 billion.”
