Many UK landlords are uncertain about the amount of tax owed on rental income each tax year. With shifting rules, multiple allowances, and evolving rates, it can be difficult to know exactly what to pay and when. Understanding tax obligations is crucial for every landlord, not just to remain compliant with HMRC, but also to optimise your tax bill.
This article will walk you through the process of calculating rental income tax, explain how allowable expenses and tax reliefs can reduce your taxable profit, and outline how MONEYSAFE can support you with professional advice and services such as property tax accountant expertise. Whether you manage one rental property or multiple rental properties, this guide will equip you with the knowledge you need to make informed tax decisions.
2. Is My Rental Income Taxable?
2.1 Why is Rental Income Taxable?
In the UK, rental income is generally treated as part of your overall income. Whenever you rent out a residential property or commercial space, the money you receive is classified as property income. Because it is income, it potentially falls under income tax. This means it must be declared to HMRC and may be subject to tax after allowable expenses are deducted.
2.2 Do I Need to Register for Self-Assessment?
Not all landlords automatically need to file a self-assessment tax return (often referred to simply as self assessment). However, if your rental income (minus allowable expenses) exceeds your personal allowance, you must typically register for a self-assessment tax return. The personal allowance is the amount of tax-free income available to UK residents each tax year. If you earn more than this allowance from your property or from other sources of income, you’ll need to declare it via an assessment tax return.
Some landlords with smaller amounts of rent may qualify for the property allowance, which we’ll discuss in detail later. However, if your rental business is your main source of income, you should expect to submit a tax return to avoid penalties or issues with HMRC.
3. Record-Keeping Requirements
3.1 Maintaining Accurate Records
One of the first rules of being a compliant landlord is to keep accurate records. This means tracking every rent payment received, along with any costs or payments you make related to the property. HMRC can request to see these records at any time, so maintaining thorough documentation is essential.
What should you record?
- Rent received and date of payments
- Allowable expenses: e.g., insurance, repairs, letting agent fees, and more
- Mortgage interest (if applicable)
- Any loss carried forward from previous years
By organising your records, you’ll be in a strong position to accurately calculate your taxable profit and fill out your self-assessment tax return. If you’re short on time or need help, MONEYSAFE provides bookkeeping services London that ensure your records are compliant with HMRC requirements.
4. How Is Tax on Rental Income Calculated?
4.1 Calculate Rental Income
Your rental income is the total amount you receive from tenants, including any additional fees or charges (for example, payments for utilities or cleaning services if you provide them). You’ll report this rental income on your self-assessment tax return as property income.
4.2 Deduct Allowable Expenses
Next, you subtract allowable expenses from your total rental income. Allowable expenses are deductions for costs that are “wholly and exclusively” related to the maintenance and management of the rental property. Common allowable expenses include:
- Insurance (e.g. landlord insurance)
- Maintenance and repairs (but not improvements)
- Utility bills (if you pay them instead of the tenant)
- Letting agent fees
- Accountant fees (e.g. MONEYSAFE for tax and property advice)
- Council tax (if the landlord is responsible)
By applying these deductions, you reduce your overall taxable income from the rental business. However, items like improvements or major renovations that increase the value of the property are typically not allowable as direct expenses; these may factor into other tax reliefs later on, such as capital gains tax when you sell.
4.3 Account for Finance Costs (Mortgage Interest)
The rules surrounding mortgage interest relief have changed significantly in recent years. Under Section 24, landlords are no longer able to deduct 100% of their mortgage interest as an allowable expense. Instead, you receive a tax credit equivalent to 20% of your mortgage interest payments. This can affect your tax liability, especially if you’re a higher or additional rate taxpayer.
4.4 Calculate Taxable Rental Profit
After subtracting allowable expenses and factoring in the mortgage interest tax credit, you arrive at your taxable profit. This amount is then combined with your other sources of income to determine your overall tax liability.
For example:
- Rental income: £12,000
- Allowable expenses: £2,000
- Mortgage interest: £3,000
You would first deduct £2,000 to reduce your taxable income to £10,000. Then, instead of deducting the entire £3,000 in mortgage interest, you would claim a tax credit on 20% of that amount, which equals £600. If you are a basic rate taxpayer (20%), this might mean a proportionate reduction in your tax bill.
5. How Much Tax Will I Pay on My Rental Income?
5.1 Tax Bands and Rates
Once you figure out your taxable profit, you apply standard income tax rates:
- Basic rate: 20% (for total income within set threshold)
- Higher rate: 40% (for total income above the basic threshold)
- Additional rate: 45% (for the highest rate bracket)
Landlords should note that their total income (including salary, dividends, and other forms of income) determines which rate band they fall into. If your rental properties push you into a higher rate bracket, you could face a bigger tax burden.
5.2 Examples of Tax Calculations
Let’s use a simplified example to illustrate:
- Annual rental income: £20,000
- Allowable expenses: £5,000
- Mortgage interest: £4,000
Taxable profit = £20,000 – £5,000 = £15,000 (before adjusting for mortgage interest rules).
Taxable portion for mortgage interest is given as a 20% tax credit on £4,000 = £800.
- If your combined income (including the £15,000 from property) places you in the basic rate bracket, you’d pay 20% on the £15,000 = £3,000. Then you could subtract the £800 tax credit, leaving a final tax payment of £2,200.
Of course, real-life scenarios might be more complex, especially if you have multiple properties or additional sources of income. Consult with a tax professional or consider an affordable accounting firm London like MONEYSAFE for personalized advice.
6. What If I Own a Rental Property with Others?
6.1 Joint Ownership
If you co-own a rental property with someone else (for instance, a spouse or business partner), your share of the profit is typically based on your ownership percentage. For married couples or civil partners, if one has a lower rate band, there may be beneficial tax planning strategies—such as the possibility of switching beneficial ownership ratios so more of the profit is taxed at the lower rate. In all cases, you should keep accurate records and seek professional advice to ensure you’re following HMRC rules.
7. Calculating the Tax on Rental Income for a Limited Company
7.1 Why Operate Through a Limited Company?
Some landlords opt to hold their rental properties in a limited company structure. This can have potential tax advantages, particularly for higher rate taxpayers, because corporation tax might be lower than personal income tax for some individuals. However, extracting profits from a company can lead to additional tax on dividends or salary, so it’s not automatically beneficial for everyone.
7.2 Changes in Corporation Tax Rates (from April 2023)
The rates for corporation tax have changed recently. As of April 2023, the main rate can be as high as 25%, though smaller profits may qualify for a lower rate. It’s essential to confirm which rate applies to your property business and to plan accordingly.
7.3 Submitting a Corporation Tax Return
If you hold your rental properties in a company, you’ll need to file a tax return—known as a CT600—for your company. This includes:
- Declaring income from rental properties
- Deducting allowable costs (including mortgage interest if relevant)
- Calculating taxable profit
- Applying the correct corporation tax rate
7.4 Claiming Capital Allowances & Annual Investment Allowance
For certain capital expenditures—like upgrades to furnishings or equipment in a furnished holiday let—you may be able to claim capital or annual investment allowance. These allowances help reduce your company’s taxable profit. Not all costs are covered, so consult with an accountant, such as MONEYSAFE, for targeted advice on how to apply allowances effectively.
8. Rental Income from Serviced Accommodation
8.1 Overview of How It’s Taxed
Rental income from serviced accommodation can be treated differently, especially if it meets the criteria of a Furnished Holiday Let (FHL). Such properties may qualify for certain tax relief benefits, including more favorable capital gains tax treatment upon disposal and the ability to claim capital allowances for furnishings.
8.2 Conditions for Furnished Holiday Let (FHL)
To qualify as an FHL, your rental property needs to meet specific occupancy conditions:
- It must be available to let for at least 210 days per tax year
- It must be let to the public for at least 105 days per tax year
- Each stay should generally not exceed 31 days
If you meet these requirements, you can potentially take advantage of certain tax reliefs not available to standard lets.
8.3 Filing a Tax Return for Serviced Accommodation
You must still declare your rental income via a self-assessment tax return or corporation tax return if held in a company. While the tax treatment might differ slightly, the process of reporting profits and paying the appropriate tax remains.
9. Ways to Reduce Buy-to-Let Taxes
9.1 Property Allowance
The property allowance is a tax relief that lets you earn up to £1,000 in property income (gross, before expenses) without paying tax. This can be handy for landlords with very small or occasional rental income. If you choose to use the property allowance, you cannot also deduct actual allowable expenses.
9.2 Deductible Expenses on Rental Income
We’ve already mentioned some typical allowable expenses (insurance, repairs, etc.). However, it’s worth emphasising that you should meticulously track these costs to deduct them correctly. Using an affordable accounting firm London such as MONEYSAFE is a time-saving way to ensure every legitimate deduction is included.
9.3 Mortgage Interest Tax Credit
The shift away from fully deducting mortgage interest to a 20% tax credit has changed the financial landscape for higher rate taxpayers. While this new approach can increase the tax burden for some, you should still keep track of all payments related to mortgage financing to correctly claim the 20% tax credit.
9.4 Domestic Items Relief
In 2016, the “Wear and Tear allowance” was replaced by domestic items relief, which allows you to claim for the replacement of items such as furniture, appliances, and kitchenware in a rental property. This relief only covers the cost of like-for-like replacements, not new acquisitions or upgrades.
9.5 Other Tax Reliefs and Strategies
- Private residence relief: This may apply if your rental property was once your main home.
- Non-resident landlords: If you live abroad but earn rental income in the UK, special rules apply.
- Splitting ownership: Potentially shift some profits to a spouse in a lower rate band.
For more detailed advice, consider working with tax accountants London at MONEYSAFE who can help design a tax-efficient strategy for your rental business.
10. Additional Landlord Tax Considerations
10.1 Council Tax Obligations
For many landlords, council tax is usually paid by the tenant if the residential property is let on a standard rental agreement. However, if the property is empty between tenancies, or if you operate serviced accommodation, you might be responsible for the council tax yourself. Keep this bill in mind when factoring in your annual costs.
10.2 Capital Gains Tax on Property Disposal
When you sell a rental property at a profit, you may owe capital gains tax (cgt). CGT rates for residential property are typically higher than for other assets, with current rates at 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers. Depending on your prior ownership and whether the property was ever your residence, certain reliefs like private residence relief may apply to reduce your CGT bill. Tracking and managing improvements and costs can also affect your CGT calculation.
11. Reporting Deadlines and Filing
11.1 Self-Assessment Tax Return Due Date
The standard due date for filing your self-assessment tax return online is 31 January following the end of the tax year. For instance, for the tax year ending 5 April 2024, the due date is 31 January 2025. Missing deadlines can incur penalties, so you must be prompt.
11.2 Penalties for Late Submission
HMRC issues automatic penalties if you miss the 31 January deadline:
- An initial £100 fine
- Additional penalties depending on how late the return is filed and if any tax remains unpaid
Relying on MONEYSAFE—a reputable London accounting firm for businesses—to handle your tax return can help you avoid last-minute rushes and financial penalties.
12. Conclusion
If you’re a UK landlord, understanding how income tax applies to your rental properties is vital for maintaining compliance and minimising your tax bill. Key points to remember:
- Rental income is taxable and must be declared via a self-assessment tax return if it exceeds the personal allowance or if your total income surpasses certain thresholds.
- You can reduce taxable income by deducting allowable expenses such as repairs, maintenance, insurance, and more.
- The mortgage interest relief system has changed, now offering only a 20% tax credit rather than a full deduction.
- Holding rental properties through a limited company requires filing a corporation tax return, which has its own tax rules and rates.
- Special tax reliefs such as the property allowance or domestic items relief might apply, and unique rules govern serviced accommodation or non-resident landlords.
- Capital gains tax or cgt applies when you sell a rental property at a profit, with specific rates for residential property.
For those who need assistance with tax planning or filing, MONEYSAFE provides comprehensive London accounting services and can act as your property tax accountant. Our offerings include small business accountants London, tax accountants London, bookkeeping services London, VAT accountants London, London tax returns, accounting for startups London, and everything else a landlord or business might need. Working with qualified experts ensures you meet all tax obligations on time, maintain accurate records, and structure your property affairs in the most tax-efficient way possible.
By taking the right steps—tracking expenses, claiming all available relief, and filing on time—you can optimise your rental business and stay on top of your tax responsibilities.
