Ahead of the Autumn budget, it is being reported that landlords may start paying National Insurance on rental incomes. Currently, National Insurance is mandatorily paid by employees and the self-employed on top of income tax, and is divided into different “classes” according to income and employment type. For many, requiring landlords to pay might seem a perfectly natural policy – perhaps to the extent that it is puzzling that the policy is not already in place. Whether absorbed into an existing class or designated a new one for landlords, it might seem that the proposal would do nothing more than rectify a baseless exemption from which landlords have long profited. There are, however, several interesting features of the proposal that are worth considering.
A rationale of meritocracy
The Times reports that the policy would intend to target “unearned” income, in contrast to raising current National Insurance rates or increasing income tax. This would have echoes of the recent inheritance tax reform, adding credence to the idea that the government of Keir Starmer and Rachel Reeves is one that focuses taxation on those who have not earned their wealth and income through work. It could be another attempt to show that this government has a driving philosophy of meritocracy.
Fairness and Practicality
Concerns have been raised that the proposal would lead to greater tax avoidance. This is matched with an argument that the measure would be unfair without wider tax reform, due to certain nuances within the tax system which mean that landlords can already pay a substantially high rate of tax. Writing on X, the analyst Dan Neidle has noted that the measure could incentivise landlords to set up small companies to legally account for properties and receive rent, instead of doing so as individuals.
The strength of this incentive is largely caused by the way in which landlords pay income tax. Namely, landlords cannot wholly deduct mortgage interest payments. This policy, phased in since 2017, means that landlords can only deduct 20% from their mortgage interest payments. To give Neidle’s example, a landlord might receive £1200 in rent but pay £1000 in mortgage interest payments. Rather than being taxed on the £200 profit, the landlord is taxed on the £1200 income with a £200 deduction (20% of the mortgage interest payment) of the resulting bill. It is analogous to businesses paying tax based on revenue rather than profits.
Effectively, this can result in a high rate of tax as they are not taxed on net income but on most of their gross income. Even though the mortgage interest payment can absorb most of the gross income, only 20% of the payment can be deducted from the tax calculated on gross income. This means that an additional tax could well lead to greater avoidance in the way Neidle describes, where taxes become overly burdensome, and suggests instead introducing National Insurance after establishing tax only on profits.
There are both theoretical debates and circumstantial nuances which can dampen concerns about landlords paying an excessively high rate due to the deductions policy. In the first place, it might not seem particularly unjust for landlords to pay a high rate of tax. While the category “unearned income” might be debatable in the most abstract philosophical senses, it is natural to see how it applies to rental incomes. Second, there may be economic or political reasons to disincentivise buying to let. Thinking more practically, it is also notable that landlords can profit so highly that the limited deduction still results in a modest effective tax rate. Notably, rent increases have outpaced mortgage payment increases. Moreover, particularly in the long term, the deductions policy can have no effect at all where mortgages are paid off or properties were bought outright. In such cases, the incentives for avoidance and any sense of injustice are both weakened.
Expediency
Ultimately, the policy seems an expedient way to raise revenue. Few voters would either be directly affected by the move or disinclined towards the government out of sympathy with landlords. Indeed, the most significant aspect of the issue might well be its focus on “unearned” income. However, this expediency may in itself be worrying. Depending on one’s perspective, this could either be an admirable example of ethically targeted taxation, or a worrying sign that the government is constrained by its reluctance to raise taxes generally, instead relying on a piecemeal approach.
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