Rachel planning to charge National Insurance on rental income

 The rumour mill is that Rachel is considering introducing National Insurance on rental income.

How ironic!

For as long as I can remember, the government and HMRC stance is that rental income is not earned income and therefore it has consequences in how it is taxed and treated.

For example you can't use rental income to make pension contributions (that can only be from earned income).  

Also unearned income bubbles to the top of the tax stack (order of taxation) so is most likely to treated at the highest level of income tax. 

By making rental income (hopefully profits rather than income) subject to national insurance it will almost certainly have unintended consequences. 

Firstly if you are past State Pension age you dont pay National Insurance. it would therefore open up the government to litigation if they make rental income subject to National Insurance for OAPs.  I can just see the negative headlines !

It is estimated that there are 1 Million Buy to Let landlords who have reached State Pension age. 

There are estimated to be 2.8 Million Buy-to-Let landlords.  Increasingly Landlords use a limited company to hold the property largely to get around tax grabs from previous governments. There are now thought to be 650,000 companies.  Rachel cannot force these companies to pay National Insurance on their profits. 

Deducting the companies from the total,  that means there are about 2.2 Million personal landlords and 1Million (approx 50%) are past State Pension age. So the burden of the National Insurance will fall on about 1 Million landlords.

Landlords past State Pension Age can now also make pension contributions with the rental income provided they are aged under 75. This contribution can potentially be eligible for 25% tax free ! 

These tax changes could mean these Landlords could make pension contributions to offset the National Insurance liability.

All natural person landlords aged under 75 would be eligible to make private pension contributions from their rental income.  For those aged over 55 they would use this to for 25% tax free.

There probably are not many landlords aged 18 to 21 but they would be exempt as well.  National Insurance applies from aged 21. [Correction under 21s do not have EMPLOYER national insurance but do pay NI from age 16 to 21]

For those that chose to make the national insurance contributions who do not have the maximum number of years of national insurance contributions for a full state pension this may be good news.  For landlords that have only rental income and "unearned income", they are not making national insurance contributions. The national insurance contributions are likely to small relative to the state pension reward. Not the outcome that Rachel wants!

Say someone is charging rent of £1,000 per month and their gross profit is 15% their eligible profit is £1,800 per year.  Say their national insurance is 8% then the tax raised is £144. If this is the sole income then this should qualify as a whole year. Each year of national insurance contributions is worth £6.58 per week (£342) of state pension income. Albeit this might be some future government's problem.

There are also Landlords which are not tax resident (or domiciled) in the UK.  Currently there needs to be witholding tax for the income (ie taxed at 20%, 40% etc).  It is perfectly possible that they may not be legally entitled to work in the UK so again there's now a legal question over whether national insurance would be applicable.  Currently it doesnt apply.  More fun for the lawyers!

Any contributions would be employee liability as there should be  no employer liability so it's a personal liability.  That means National Insurance contributions start in excess of £12,570  earned income which rental income would now be.

If the landlord only has rental income that now means rental income is earned income and now fills the £12,570 personal allowance.  Beyond that 8% would be payable falling to 2% above £50,570.

However self employed people only pay 6% national insurance and zero employer national insurance.  If Rachel makes this 8% then there's a reasonable legal case since self employed pay 6%. In either case it means HMRC now consider rental income to be a business ! If Landlords have to pay employer national insurance and employee national insurance then BTL is absolutely now a business and therefore section 24 has to be revoked.  The business would be now eligible for de minimis employer national insurance relief through the Employment Allowance.  This is currently £10,500.  Most Landlords will be happy about this.  They end up paying zero national insurance and now have state pension contributions !!

Either way, the rental income is now earned income and can now be used to make personal pension contributions to reduce tax and national insurance bills which wasn't possible before.

Basically this may not yield what Rachel thinks.

It also opens the flood gates for litigation against the government. The historic position has always been that this was not earned income but now suddenly it is !!  Doubtless there are landlords with historic grievances that may decide a class action against the government is fair game ! This could result in a retrospective claim going back 7 years.  Doubtless there are HMRC test cases proving this is unearned income.  What fun for the lawyers!!

If the Landlord does end up paying National Insurance, you can be sure that this will be passed onto tenants as a rent increase.  Who suffers the "working people" who Rachel promised to protect..... Thanks tenants - you're now paying for the property and the pension !

We obviously need to wait and see what Rachel actually does but this does seem to be a genuine Labour idea originating from Torsten Bell.  If rental income is now earned income that means this is really a business and therefore the legality of section 24 can be challenged (and retrospectively go back 7 years if successful).  If rental income is earned income but not a business then it's investment income in which case there's another legality challenge since other investment income is not subject to national insurance whereas this would be.  

Next read:  Rent increases - private or public - which is worse?