Comparison · Tax · 2026
Salary vs Rental Income Tax 2026: How They Differ
£40,000 of salary and £40,000 of rental profit are taxed at the same income tax bands — but the take-home can be very different. Salary suffers National Insurance on top of income tax, and brings pension auto-enrolment; rental income escapes National Insurance entirely, but is squeezed by the Section 24 mortgage interest restriction and cannot support pension contributions. This 2026 comparison sets out the full treatment of earned versus property income side by side — the shared tax bands, the NI gap, allowable expenses, the £1,000 property allowance and Section 24 — with worked examples.
TL;DR — 30-Second Summary
- • Same income tax bands: both pay 20/40/45% with the £12,570 Personal Allowance
- • National Insurance: salary pays it (8%/2% + employer NI); rental income does not
- • Section 24: landlords get only a 20% credit on mortgage interest, not full relief
- • Pensions: only salary counts as earnings for pension relief and auto-enrolment
Side-by-Side Tax Treatment
| Feature | Salary (earned) | Rental income (property) |
|---|---|---|
| Income tax bands | 20% / 40% / 45% | 20% / 40% / 45% |
| National Insurance | 8% then 2% (+ employer 15%) | None |
| Mortgage interest relief | N/A | 20% credit only (Section 24) |
| Allowable expenses | Very limited | Yes — costs of letting |
| £1,000 allowance | No | Yes — property allowance |
| Counts for pension | Yes (relevant earnings) | No |
| How it is collected | PAYE (automatic) | Self Assessment |
The National Insurance Gap
The single biggest difference is National Insurance. Salary attracts 8% employee NI up to the upper earnings limit and 2% above it, plus 15% employer NI that your employer bears. Rental income is investment income, so it pays no National Insurance at all.
On £40,000, that NI alone is worth thousands of pounds a year to a landlord compared with an employee — though the employee's NI also buys State Pension and contributory benefit entitlement, which rental income does not. The exception is property activity that amounts to a genuine trade (such as a substantial furnished holiday let), which can attract Class 2 and Class 4 NI.
Section 24 — the Landlord's Drag
Working the other way, Section 24 restricts mortgage interest relief. Landlords add the full interest back to taxable profit and receive only a 20% basic-rate tax credit, rather than deducting it in full.
For a basic-rate landlord this is broadly neutral, but for higher and additional-rate landlords it caps relief at 20% — increasing tax and sometimes pushing taxable profit into a higher band. Salary has no equivalent restriction. Section 24 is the main reason some landlords hold property through a company, where it does not apply. See the Section 24 guide for the mechanics.
Expenses and the Property Allowance
Rental profit is calculated after allowable expenses — letting and management fees, repairs (not improvements), insurance, ground rent, service charges, accountancy and certain travel. There is also a £1,000 property allowance: rental income under £1,000 is tax-free, and above that you can deduct £1,000 instead of actual expenses if it is more favourable.
Salary, in contrast, is taxed on the gross figure with almost no deductible expenses. This expense regime can substantially reduce a landlord's effective tax rate.
Worked Example: £40,000 of Each
A simplified comparison of £40,000 of salary versus £40,000 of rental profit (after expenses, no mortgage), for someone with no other income, 2026/27:
| Item | Salary | Rental profit |
|---|---|---|
| Income tax | ~£5,486 | ~£5,486 |
| Employee NI | ~£2,194 | £0 |
| Net income | ~£32,320 | ~£34,514 |
The landlord keeps roughly £2,200 more, purely because there is no National Insurance — and this assumes no mortgage. Add a buy-to-let mortgage and Section 24 narrows or reverses that advantage for higher-rate landlords. Model your salary side with the take-home pay calculator and your property side with the rental income tax calculator.
The Bigger Picture
Rental income wins on National Insurance and expenses, but salary wins on pensions: only earned income counts as “relevant earnings” for pension tax relief, and only salary brings auto-enrolment and an employer contribution. Salary is also collected automatically through PAYE, while landlords must file Self Assessment — and, from April 2026, face Making Tax Digital for Income Tax. Most people will have both types of income at some point; understanding the different treatment helps you plan tax-efficiently across them.