Landlords Face National Insurance on Rental Income as Treasury Targets Unearned Revenue Budget Gap

The Treasury is actively considering a tax increase on landlords by extending national insurance contributions to rental income for the first time. In a move designed to fill a potential £40 billion gap in public finances, officials are weighing up proposals that could see landlords paying national insurance at the same rate as employees on their “unearned” rental proceeds.

The Labour government led by Chancellor Rachel Reeves has previously pledged not to increase the core rates of VAT, income tax or national insurance. However, insiders now suggest that expanding the types of income subject to national insurance, rather than raising rates, allows the government to sidestep these so called “red lines”. Allies of Reeves note the comparison to adding VAT to private school fees, viewing it as a technical adjustment rather than a broken promise.

Earnings from property, pensions and savings have historically been largely exempt from national insurance, which generally runs at eight per cent for employees. Analysis of HMRC data indicates that an eight per cent levy on the £27 billion in net property income from 2022–23 would have generated over £2 billion in additional tax revenue. Landlords earning annual property income in the £50,000 to £70,000 bracket—of whom there are more than 360,000—could see their tax bill rise by an estimated £1,057 each year if the measure is introduced.

Policy advocates argue that applying national insurance to rental income would make the tax system fairer and more efficient by closing the gap between how earned and unearned income is taxed. The Resolution Foundation, whose former head Torsten Bell is now playing a central role in Labour’s budget preparations, originally floated the policy and maintains that the approach would help ensure landlords do not face lower tax rates than the people who rent from them.

Not everyone is convinced. Critics warn the measure could prompt landlords to sell up, constricting the lettings market and potentially pushing up rents. There is concern that more landlords may form business structures to sidestep additional levies, or simply exit the private rental market altogether. Some supporters counter that if landlords exit, it could strengthen opportunities for renters to purchase homes, particularly with the protections embedded in Angela Rayner’s Renters’ Rights Bill. This legislation will prevent landlords from increasing rents for existing tenants by more than once a year or above market rates, lessening the risk of immediate rent hikes.

The wider context is one of mounting fiscal pressure on the government. With borrowing costs on the rise and existing tax pledges restricting new revenue-raising measures, the Chancellor is expected to cast the net widely this autumn. There remains speculation about increased taxation on high value homes, changes to tax-free pension lump sums and possible adjustments to gambling taxes. Reeves’s strategy appears to centre on protecting “working people”—defined as those earning a regular wage or salary—while searching for new sources of revenue from property and capital.

The political and economic risks are clear. Applying national insurance to rental income could reshape the lettings market and household disposable incomes in unpredictable ways. The situation will be closely watched by both property investors and renters as the government seeks to balance its promises with the realities of public finance.