Buy to let
Buy to let in 2026: how to check if the numbers still work
A rental property can look profitable on the back of an envelope: rent comes in, the mortgage goes out, and the difference is yours. In practice there are four things that decide whether it works, and two of them have changed a lot in recent years. Here they are, worked through on one example.
The example
A £220,000 flat let for £1,200 a month, bought with a 25% deposit and a £165,000 interest-only mortgage at 5%. It is let through an agent charging 12%, with two empty weeks a year, 8% of the rent set aside for repairs and £650 a year for insurance and safety checks. The owner is a higher-rate taxpayer.
1. Yield: the first filter
Gross yield is a year's rent divided by the price: £14,400 on £220,000 is 6.5%. After the agent, empty weeks, repairs and insurance, the net yield is 4.7%. With a mortgage costing 5%, that gap is the problem in one line: if the property earns less than the borrowing costs on the borrowed part, the mortgage eats the profit.
2. The tax rule that changed everything
If you own the property yourself, you can no longer deduct mortgage interest from the rent before tax. Instead you pay tax on the rent minus running costs, then get a credit worth the basic rate of tax on the interest. This is usually called Section 24.
In the example, rent minus running costs is £10,427. A higher-rate taxpayer pays 42% on that from April 2027, which is £4,379. The credit on £8,250 of interest is 22%, or £1,815. So the tax bill is £2,564, even though the cash left after interest is only £2,177. You can pay more in tax than the property actually made.
| Owned by | Tax a year | Left each month |
|---|---|---|
| Basic-rate taxpayer | £479 | £141 |
| Higher-rate taxpayer | £2,564 | -£32 |
| Additional-rate taxpayer | £3,086 | -£76 |
| Limited company | £414 | £147 |
All figures use the tax rules from April 2027. The same property makes money for some owners and loses it for others, purely because of tax.
3. The April 2027 property tax rise
From April 2027, rental profits are taxed at their own rates: 22%, 42% and 47%, two points above the rates on other income. The credit for mortgage interest rises to 22% too. On this property the change costs the higher-rate owner about £43 a year, but on a bigger or less indebted portfolio the extra two points add up quickly.
Run the numbers at your own tax rate, not someone else's. A deal that works for a basic-rate landlord can lose money for a higher-rate one.
4. The lender's rent test
Buy to let lenders mostly decide how much to lend from the rent, not your salary. A common test is that the rent must cover the interest, worked out at a "stress" rate of around 5.5%, by 125% for basic-rate taxpayers and companies or 145% for higher-rate taxpayers.
For the £165,000 loan, that means rent of at least £945 a month for a company or basic-rate taxpayer, and £1,097 for a higher-rate taxpayer. At £1,200 the example passes. If the rent were only £1,000, a higher-rate taxpayer could borrow about £150,000 and would need a deposit of around £70,000 rather than £55,000.
What a limited company changes
A company deducts mortgage interest in full and pays corporation tax, 19% on profits up to £50,000. That is why it comes out ahead in the table. But it is not free money: taking profits out, for example as dividends, is taxed again; company mortgages can cost more; and moving a property you already own into a company usually triggers stamp duty and capital gains tax. It tends to suit landlords building a portfolio for the long term and reinvesting the profits.
What moves the numbers
- Managing it yourself. Dropping the 12% agent turns the higher-rate owner's -£32 a month into about +£48, in exchange for your time.
- A lower rate. At 4% instead of 5%, the same owner keeps about £75 a month.
- Higher rent for the price. The higher-rate owner breaks even at about £1,272 a month, a gross yield of roughly 6.9%. Many landlords now look for 7% or more before tax.
And the number the monthly figure leaves out: capital growth. Many buy to let investors accept a small monthly loss in the hope the property rises in value. That can work, but it is a bet on house prices, so be clear that is what you are making.
Check your own deal
The buy to let calculator runs all of this for any property: pick the area to fill in typical prices and rents, choose how you would own it, and it shows yield, monthly cashflow after tax, return on your cash and whether the rent passes the lender test.