Rachel Reeves' tax gamble: what it means for the UK mortgage market

As Westminster fixates on whether Rachel Reeves can survive her first full Budget, mortgage brokers will be less interested in the political drama than in a simpler question: what do these tax changes do to borrowers’ disposable income, and thus to affordability?

The early answer is clear enough: if the Chancellor presses ahead with a 2p rise in income tax, only partially offset by a 2p cut in National Insurance for those earning under £50,270, the overall tax burden will rise for millions – especially pensioners and landlords who do not pay NI at all. 

In a market that is only just regaining its footing after the rate shock of 2022–23, even a modest fiscal squeeze risks taking the edge off demand and constraining how far households can stretch on a mortgage.

The backdrop: a fragile recovery in mortgages

The Budget row comes at a delicate moment for the housing market. Average fixed rates have eased materially over the past year, with the cheapest 2-year fixes for low loan-to-value (LTV) borrowers now in the high-3s to low-4s, and 5-year fixes only a shade higher. 

Read next: More first-time buyers seek low LTV mortgages

The Bank of England has held Bank Rate at 4 per cent, in a narrow vote, as policymakers wait for clearer evidence that inflation is durably on course to return to 2 per cent. Mortgage approvals have edged up to around 66,000 a month – the highest in nine months but still some way below the peaks of the last decade.

House prices, meanwhile, have proved more resilient than many forecast. Halifax and Nationwide both report modest but positive growth, with expectations of low single-digit price rises in 2025 and activity continuing to recover, albeit with affordability still stretched in many regions. 

In other words: the market is healing, but it is in no position to shrug off a meaningful hit to household incomes.

The package: higher income tax, selective NI relief, and pensions

The outline of Reeves’ plans is now familiar:

• A 2p increase in income tax rates across the main bands.

• A matching 2p cut to employee National Insurance, but only on earnings up to £50,270.

• Pension changes, likely including restrictions on the tax advantages of salary sacrifice and workplace pension contributions, while leaving the 25 per cent tax-free lump sum intact. 

Because NI is only paid on earnings and not on pensions or rental income, the losers are clear:

• Middle-to-higher earners whose income sits significantly above the £50,270 threshold.

• Pensioners with taxable income, who will face higher income tax but gain nothing from the NI cut. 

• Landlords, whose rental income is exposed to the higher income tax rate but again attracts no NI relief.

Layered on top of frozen tax thresholds – themselves already pulling more households into higher bands – this is a classic “fiscal drag plus rate rise” combination.

From a lender’s perspective, the key question is not the politics but the impact on net income after tax and the stability of that income over time.

Affordability: a quiet squeeze on borrowing power

Brokers will need to factor in three main channels through which the Budget may weigh on affordability:

1. Lower post-tax income for key borrower segments

For many clients, particularly dual-income households where one or both partners earn above the NI cut-off, the combined effect of higher income tax and limited NI relief will be a tangible reduction in monthly take-home pay.

That hits:

• Established professionals in the South East and major cities, where salaries commonly straddle or exceed £50,000.

• Senior public sector staff – consultants, heads of department, senior teachers – often already stretched by childcare, student loans and existing housing costs.

Even a seemingly modest tax increase can knock the edge off maximum loan sizes once affordability calculators are updated. A few percentage points off usable income can trim tens of thousands of pounds from the borrowing capacity of a higher-rate taxpayer, particularly under more conservative lender stress tests.

2. Pension and salary sacrifice changes

Any move to cap or claw back the advantages of pension salary sacrifice and other workplace schemes will alter how some borrowers structure their remuneration.

In practice, that means:

• Some clients may reduce pension contributions to offset higher tax, boosting short-term take-home pay but weakening long-term financial resilience.

• Others, particularly higher earners, may see the overall tax efficiency of their compensation fall, eroding the surplus income that currently supports larger mortgages.

For brokers, it will become even more important to understand how a client’s pension and benefits package interacts with their net income and to sense-check that any short-term adjustment to “make the numbers work” does not leave them financially exposed.

3. Confidence and sentiment

Affordability is not merely arithmetic; it is psychological. A Budget framed publicly as a “tax raid” on workers and pensioners risks denting confidence just as the market was regaining its nerve. 

If households come to believe that this is only the first of several rounds of tax rises, many will simply defer moving, trading up or taking on fresh debt – particularly in regions where prices have already run hard ahead of local incomes.

First-time buyers and key workers

The politics of the proposed tax rise is sharpened by who is caught in the cross-fire: NHS staff, teachers, police officers and other key workers – many of them exactly the clients brokers have been trying to coax back into the market.

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Teachers in the Home Counties, specialist nurses in major teaching hospitals and experienced uniformed services staff frequently sit close to or above the £50,000 line once overtime and allowances are included. These are not the “very wealthy”; they are the backbone of the conventional first- and second-step buyer market.

For such clients, the combination of:

• lingering high housing costs,

• stubbornly elevated mortgage rates compared with the pre-Covid era, and

• now, a higher income tax take,

is likely to mean tighter affordability calculations and more borderline cases.

Brokers should expect:

• More cases failing on income multiples, particularly where borrowers already sit at the upper end of 4.5–5x limits.

• Greater demand for longer terms – pushing towards 30, 35 or even 40 years – to make monthly payments stack up.

• Renewed interest in joint borrower/intermediate family support to bridge affordability gaps.

Landlords, pensioners and the buy-to-let market

If the Budget does indeed load more tax onto pensioners and landlords, the buy-to-let market is a likely pressure point. Pensioners with rental portfolios – often relying on that income in retirement – would face higher tax on rents with no compensating NI cut.

The implications could cut several ways:

• Some landlords may seek to raise rents to preserve post-tax yields, further squeezing tenants already struggling with cost-of-living pressures.

• Others may choose to sell, especially heavily geared landlords who have already absorbed the loss of full mortgage interest relief and recent rate rises.

• Portfolio restructuring – moving assets into companies or among family members – could create pockets of advisory demand as owners try to mitigate the new regime.

For brokers with a strong buy-to-let book, this environment suggests fewer aggressive acquisitions but a steady flow of remortgage, restructuring and exit-strategy conversations. It also heightens the importance of stress-testing landlords’ cash flows under higher tax assumptions and realistic void/rate scenarios.

Read next: Tax increases on rental sector could undermine economic growth – NRLA

Rates, gilts and the risk of market nerves

So far, markets have taken the prospect of higher taxes in their stride, on the assumption that Reeves will prioritise fiscal stability and debt reduction. The Bank’s decision to hold rates, rather than resume cuts, reflects concern that inflation remains sticky and that the Budget itself could influence the path of prices and growth. 

Two risks matter for brokers:

1. Gilt market reaction – If the Budget is perceived as politically unsustainable or economically incoherent, gilt yields could rise, pushing up swap rates and, in turn, wholesale funding costs for lenders. That would cap or reverse recent reductions in fixed-rate mortgages.

2. Political instability – An open revolt on the Labour benches, talk of leadership challenges or prolonged wrangling over the tax package would further unsettle market expectations and could keep lenders cautious on pricing.

At present, however, the central case remains one of gently easing mortgage rates over the next year or two, provided inflation behaves and fiscal policy is seen as credible. 

What mortgage brokers should do now

While the detail of the Budget may still shift, the direction of travel is unlikely to change: a heavier overall tax burden, particularly on middle earners, pensioners and investment income. For brokers, five practical responses stand out:

1. Update your affordability assumptions quickly

   • As soon as the new tax rates and thresholds are confirmed, ensure your sourcing and internal calculators reflect post-tax income accurately. A conservative approach early on will reduce the risk of cases falling over at underwriting.

2. Segment your client base

   • Identify cohorts likely to be worst affected – higher-rate taxpayers just above the NI cut-off, pensioner borrowers, and landlord clients – and prepare tailored communications explaining how their position may change.

3. Re-examine term, structure and protection

   • Expect more clients to rely on longer mortgage terms or interest-only elements to manage payments. Balance this with robust discussions around later-life affordability and appropriate protection, particularly where pension saving is being trimmed to offset tax.

4. Be ready for a timing flurry

   • Some borrowers, especially landlords and older clients, may seek to bring forward purchases, refinances or disposals ahead of implementation dates. Lining up pipelines now – and being honest about processing times – will be essential.

5. Lean into your advisory role

   • Clients will be bombarded with headlines about “tax raids” and “broken promises”. Cutting through the noise with calm, numerate explanations of what the changes mean for their mortgage, in their circumstances, is where brokers can add most value.

The verdict

If confirmed, Rachel Reeves’ Budget will not derail the mortgage market on its own. But by quietly eroding disposable incomes in the very segments that drive mainstream lending, it will make an already tight affordability picture a little tighter.

For brokers, the opportunity – and the challenge – lies in staying ahead of the curve: understanding the tax mechanics, recalibrating affordability swiftly, and guiding clients through a more demanding, more fiscally constrained era of home ownership.

Picture: UK Parliament, This file is licensed under the Creative Commons Attribution 3.0 Unported license.