The UK government, led by Chancellor Rachel Reeves, is considering a new tax on rental income by applying national insurance contributions (NICs), aiming to raise around £2 billion to help address a projected £41 billion shortfall in public finances by 2029-30.

Currently, NICs are 8% but only apply above a threshold of £50,270, and the proposed change would extend NICs to rental income without increasing the rate, thus avoiding commitments not to raise VAT, income tax, or NICs.

This move is part of Reeves' broader strategy to increase revenue by expanding the income base subject to NICs, aligning with Labour's pledge not to raise taxes on working people.

The government's effort to raise revenue is driven by a forecasted £41 billion shortfall in balancing public spending and tax revenue by 2029-30, as highlighted by the NIESR economic think tank.

The proposed NICs on rental income could generate approximately £2.18 billion based on 2022-23 data, with the policy involving an 8% tax on net rental income.

Supporters, including some Labour MPs and government aides, see this as a way to make the tax system fairer by taxing 'unearned revenue' from landlords and increasing government revenue without breaking existing tax pledges.

Critics warn that taxing landlords more could lead to property sales, reducing rental stock and pushing up rents, but supporters argue it could help more renters access homeownership.

Treasury officials emphasize that economic growth and reforms are the preferred methods to strengthen public finances, with plans to boost the economy by £6.8 billion and reduce borrowing by £3.4 billion, while maintaining low taxes for working people.

Expanding NICs to include rental income is viewed as a targeted approach to address 'unearned revenue' from landlords, fitting within the broader strategy to find new revenue sources.