Landlords to pay National Insurance on rental income?

Given the government faces a £41 billion budget shortfall, ministers will no doubt be discussing ways of plugging the gap. They’ll also have to be creative. Labour has committed to slash the public debt, making it difficult to increase borrowing. It also ruled out increases in key taxes such as Income Tax, VAT and National Insurance. (It has, though, pushed up the rate of Employer National Insurance). You may not be surprised, therefore, that Labour insiders have told the Times that the Treasury is considering making landlords pay National Insurance on rental income.

What are the rules covering National Insurance on rental income?

Unlike income from employment or self-employment, rental income is largely exempt from National Insurance. However, in some instances landlords may be able to make voluntary NI contributions to help ensure they qualify for the full state pension.

That said, many smaller landlords rent out properties in addition to working in employment or self-employment. Not having to pay National Insurance on rental income is, therefore, a major benefit and incentive.

To put the figures into perspective, rental properties generated £27 billion in net income during 2022-23. If National Insurance at the normal rate of 8% were applied to this sum, the Treasury would benefit from an extra 2.18 billion.

When could NI be applied to rental income?

The report in the Times suggests that Chancellor Rachel Reeves is thinking of announcing National Insurance on rental income in her 2025 Autumn Budget.

What rate could National Insurance on rental income be?

Assuming that the Chancellor does apply NI to rental income, we don’t yet know what rate will apply. Currently, the self-employed pay NI at 6% on annual profits between £12,570 and £50,270. Profits over that amount are liable for a 2% National Insurance charge. Employees pay slightly more at 8% on earnings between £12,570 and £50,270, then 2% on income over this amount.

Given these figures, it’s reasonable to assume any imposition of NI on rental income will be at a similar level.

Has the government confirmed NI will be applied to rental income?

According to The Negotiator, the Treasury has not commented directly on the leak. It did, however, say:

“As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy, which is our focus.

“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.”

We’d say that, given the lack of outright denial, there’s a very strong chance that landlords will end up paying National Insurance on rental income very soon.

What will happen if the changes do happen?

Certainly, if the Chancellor does apply National Insurance to rental income, then she’ll generate significant extra income for the government.

That said, she needs to be very careful. Many small landlords are already operating on very small margins. These have already been eaten away by major changes over the last decade, notably the withdrawal of mortgage interest relief. If the introduction of NI on rental income does become a reality, it could push rents up. It could also decrease the availability of urgently needed affordable tenancies. Furthermore, if lots of landlords to sell up to homeowners, it could exacerbate the housing shortage.

Only time will tell whether landlords will be hit by National Insurance on rental income. We’ll keep you updated. However, if you are looking for expert help with your rental homes, be sure to consider our Landlords’ Platinum Accounting Service. It not only gives you access to free MTD-compliant accounting software for landlords, but also provides you with benefits that range from priority access to CGT services on property sales to the arrangement of fee-free buy-to-let mortgages via our partners. Click here to arrange a call with us to discuss your needs and options.