1. Introduction
A Complete Guide to Tax on Rental Income UK
If you are considering becoming a landlord, you may wonder, “How much tax do I pay on rental income in the UK?” Understanding rental income tax is fundamental for anyone who owns one or more rental properties. Whether you have a single rental property or a portfolio of properties, knowing how to calculate, report, and pay the right amount of tax to HMRC is crucial.
At MONEYSAFE, we aim to simplify the rules around income tax on rental business activities. In this comprehensive guide, we will explain everything from how to calculate taxable profit for individual landlords, how mortgage interest is treated under Section 24, and how to handle corporation tax for a property business. We will also cover allowable expenses, capital gains tax, and any tax reliefs you might claim to reduce your tax liability. By following these steps, you can minimize your tax bill while fulfilling your tax obligations.
This article is applicable whether you have a home you rent out temporarily, multiple rental properties in the UK, or are a non-resident landlords collecting rent from abroad. Let’s dive in.
2. Working Out the Tax on Rental Income for an Individual Landlord
Being an individual landlord in the UK means your rental income is typically subject to income tax. The tax year runs from 6 April to 5 April of the following year. You usually need to include rental income in a self-assessment tax return (or assessment tax return) if your total annual income exceeds your personal allowance, or if your rental profits alone surpass certain limits set by HMRC.
Calculate Rental Income
To figure out how much taxable income you earn from your rental property, you start by working out the gross amount you receive in rent. This amount includes not just monthly rent but also additional payments from tenants, such as fees for utilities if you pass those costs on to them.
- Example: Suppose you collect £12,000 in rent a year from your single rental property. If you charge your tenant £50 a month for water, and they pay it directly to you, this extra £600 per year also counts toward your total rental income.
Once you identify your gross receipts, the next step involves subtracting any allowable expenses.
Deduct Allowable Expenses
Allowable expenses are the deductions you can claim against your rental income to arrive at your net profits. They reduce your overall taxable profit. Some common allowable expenses include:
- Insurance: Property and landlord insurance premiums are typically deductible.
- Repairs and Maintenance Costs: You can deduct the expenses of maintaining the property in a rentable condition, such as painting, replacing broken windows, or fixing plumbing issues.
- Agency Fees: If you pay letting agents or other services to manage your rental business, these fees usually qualify as allowable expenses.
- Accountant or Tax Professional Fees: If you hire a professional for advice, guidance, or to prepare your tax return, these costs can be deducted.
However, not all costs are directly deductible. For instance, improvements or renovations that substantially increase your property’s value may count as capital expenditures, which typically are not immediately allowable against rental income but might factor into capital gains tax (CGT) calculations if you sell the property later.
Account for Finance Costs
Many landlords rely on a mortgage to acquire a rental property. In previous years, you could claim mortgage interest payments in full as an expense, but the rules have changed under Section 24 of the Finance Act 2015. Now, you receive a tax credit for mortgage interest at the basic rate (currently 20%) rather than deducting the full interest from your taxable income. This means higher-rate taxpayers have a more limited relief on their mortgage interest than they did historically.
Calculate Taxable Rental Profit
Once you have:
- Determined your total gross rental income
- Subtracted allowable expenses (repairs, fees, etc.)
- Factored in the limitation on mortgage interest deduction (via the Section 24 tax credit)
You will arrive at your taxable profit. The rate of income tax you pay depends on your total income (including wages, business profit, and any other foreign income sources). Your tax liability also depends on whether you exceed your personal allowance (the portion of your taxable income that you do not pay tax on).
3. Interest Relief Restriction (Section 24)
A Complete Guide on Interest Relief Restriction (Section 24) on Landlords
Section 24 significantly altered how mortgage interest could be offset against your rental income. Previously, landlords could deduct 100% of mortgage interest as an expense, reducing their taxable profit. Since the full phasing in of Section 24, you can only claim a 20% tax credit on mortgage interest payments rather than deducting the interest in full.
- Implications for Higher/Additional Rate Taxpayers: If you pay 40% or 45% income tax, you only receive a tax relief of 20% on your mortgage interest. This can significantly increase your tax liability if you have a large mortgage.
- Basic Rate Taxpayers: For those in the 20% bracket, Section 24 might not cause much difference, as the tax credit is also 20%.
These rules are critical for any UK property investor hoping to maximize their profit and remain compliant with HMRC. If you are worried about your tax bill, consider consulting a property tax accountant or a financial advisor on possible ways to mitigate the impact, such as transferring properties into a limited company or reviewing your financing structure.
4. Reporting Tax on Rental Income to HMRC
Self-Assessment Tax Return Due Date
If you are required to declare rental income, you must do so through a self-assessment tax return. In the UK, the paper assessment tax return deadline is 31 October, while online tax returns must be filed by 31 January following the end of the previous tax year. For instance, for the tax year ending on 5 April 2023, the online submission deadline is 31 January 2024.
Failure to submit a tax return on time can lead to penalties. The penalty structure includes an immediate fine if you miss the 31 January deadline, and additional fines can accrue over time. Additionally, if you fail to pay any outstanding tax bill on time, you may be subject to interest charges.
What if I Own a Rental Property with Others?
When you co-own a rental property, each landlord is responsible for declaring their share of rental income and allowable expenses. Typically, rental income is split in proportion to each person’s ownership stake. However, if you have a joint ownership structure (for instance, as a married couple) but want to split rent in a different proportion, you usually must inform HMRC by submitting the appropriate form (Form 17). The details for dividing profits or loss must align with the legal ownership structure. Always maintain accurate records to substantiate the split.
5. Calculating the Tax on Rental Income for a Limited Company
If you have decided to set up a limited company to hold your rental properties, the tax treatment differs from that for individual landlords.
Changes in Corporation Tax Rates
Starting from April 2023, the rates of corporation tax underwent changes. Previously, the rate was set at 19% for most companies. New rules introduced a rate between 19% and 25%, depending on profits. If your limited company’s taxable profit is below a certain threshold, you might still pay the lower rate; otherwise, you’ll pay a higher rate or a marginal rate somewhere between 19% and 25%. Always verify the current rates to ensure accurate forecasting of your tax liability.
Submit Corporation Tax Return
Companies must file a corporation tax return, known as a CT600, within 12 months of the end of their accounting period. If your company has rental properties, the rent you collect minus your allowable expenses, minus other deductions (like domestic items relief for furnished rental properties, if applicable), will result in your net profits. You will then pay corporation tax on those profits.
Remember, companies also must file annual accounts with Companies House and maintain thorough records. Missing these deadlines can result in stiff penalties. If your company does not file or pay on time, you could face surcharges and additional interest on any unpaid tax.
Claim Capital Allowance and Utilise Annual Investment Allowance
Unlike individual landlords, a company might have more flexibility regarding capital expenditures. For certain property fixtures (like integral features or equipment used in the rental business), you can claim capital allowances, including the Annual Investment Allowance (AIA). This can significantly reduce your company’s taxable profit.
- Capital Allowances: These let you offset the cost of certain assets against your profits.
- Annual Investment Allowance: Under this allowance, companies can deduct the full cost of qualifying items (e.g., certain furnishings, tools, and equipment) up to an annual limit.
Check whether the assets you purchase for your rental business qualify for this relief. If you are unsure, you may want professional advice from a reliable accountant.
6. Rental Income from Serviced Accommodation
Overview: How Rental Income from Serviced Accommodation is Taxed in the UK
Serviced accommodations, such as holiday lets, follow different rules than standard rental properties. They often come with additional tax obligations, because a serviced apartment might be treated like a business with more frequent turnovers. If you let short-term holiday stays, you generally remain liable for rental income tax but can qualify for special tax reliefs if the accommodation meets Furnished Holiday Let (FHL) conditions.
Qualifying as a Furnished Holiday Let (FHL)
To be considered an FHL for tax purposes, your rental property must meet certain criteria:
- It must be furnished.
- It must be available for short-term lets to the public for at least 210 days per tax year.
- It must be actually let out for at least 105 days in the tax year.
When a serviced apartment qualifies as an FHL, you may be eligible for unique perks such as capital allowances on furnishings, the ability to claim private residence relief in some circumstances, and domestic items relief. Also, non-resident landlords who operate UK-based holiday lets need to follow specific rules for reporting and paying tax on their UK-based property.
Tax Return Filing for Serviced Accommodation
Whether you hold your serviced accommodation personally or through a limited company, you must still file the appropriate tax return:
- Individuals: Include the rental income on your self assessment if you operate the serviced apartment personally.
- Companies: File a corporation tax return if your serviced accommodation is owned by a limited company.
Always keep accurate records of the amount you earn, as well as any expenses you can demonstrate are for business usage, including cleaning services, linens, and marketing.
7. Examples & Rental Income Tax Calculator
Rental Income Tax Calculator
In many situations, a rental income tax calculator can help you estimate your tax liability. While we cannot provide an interactive calculator in this article, the basic principle remains:
- Add up your total rental income for the tax year (all rent and related fees).
- Subtract any allowable expenses (maintenance, insurance, management fees, etc.)
- Account for the limitation of mortgage interest payments under Section 24 (typically a 20% tax credit).
- Combine the resulting figure with your other income to see if you surpass your personal allowance.
- Apply the relevant basic rate, higher rate, or additional rate of income tax on your net taxable profit.
For an example, let’s suppose:
- Rent: £10,000 per year
- Allowable expenses: £1,500
- Mortgage interest: £2,000 (but you only receive a 20% tax credit = £400 off your final tax bill)
- Other Income: £25,000 from employment
Your net taxable profit before the interest limitation is £8,500. If this £8,500 plus your other income minus your personal allowance puts you in the basic rate bracket, you apply 20% on that portion of taxable income. You then offset £400 via the mortgage interest tax credit. The result is your final tax owed on the rental income.
8. Other Considerations for Landlords
What Tax Expenses Can I Claim?
Common allowable expenses for landlords include:
- Insurance (landlord insurance, building, and contents coverage)
- Property repairs and maintenance
- Letting agent fees or property management fees
- Some legal costs, e.g., eviction expenses or lease structuring
- Accountant or tax professional fees for preparing your tax return
Keep track of these thoroughly, as over-claiming or under-claiming can lead to compliance issues with HMRC. If you provide new furniture for your rental property, you may claim domestic items relief for replacements of items such as sofas or white goods, but you must meet specific conditions for that to qualify.
Losses
Sometimes, landlords might make a loss on their rental business in a particular tax year—for instance, if allowable expenses and financing costs exceed rental income. You can usually carry this loss forward to offset against future profits from the same property business. This process reduces your future tax liability. Keep detailed records of your loss so you can use it appropriately in subsequent years.
Capital Gains Tax
Capital gains tax (or CGT) may apply if you sell your rental property at a profit. The amount of CGT owed depends on your overall taxable gains, which is the sale price minus the purchase price (and certain allowable costs like estate agent fees or capital improvements). Your CGT rate on residential properties is typically higher than CGT rates for other assets. For landlords, the CGT rates can be 18% for basic-rate taxpayers or 28% for higher-rate taxpayers on any gains realized.
If the property used to be your main residence before letting it out, you might benefit from private residence relief for the portion of time you lived there. Keeping accurate records of purchase costs, improvement payments, and the property usage timeline is critical for ensuring correct CGT calculations.
Record Keeping Tips for Rental Income
For tax purposes, HMRC requires landlords to maintain accurate records of all rent, expenses, and any relevant communications for at least five to six years after the tax year has ended. If you own multiple properties, it is crucial to keep separate documents for each rental business activity. Effective record-keeping can help you:
- Substantiate allowable expenses if HMRC queries your tax claims
- Make the correct calculations for your self-assessment tax return
- Track and carry forward any loss
- Simplify the process of claiming relief (e.g., mortgage interest or domestic items relief)
Many landlords use specialized software or an accountant to manage their finances efficiently. Having good documentation from day one will save you a lot of trouble during the year-end process, especially if your rental arrangement is complex (e.g., you have multiple rental properties, or you receive foreign income from overseas lets).
9. Conclusion
Summary
“How much tax do you pay on rental income in the UK?” The answer depends on various elements:
- Rental Income Calculation: You start by adding up all rent and related fees.
- Allowable Expenses: Subtract allowable expenses such as repairs, insurance, agent fees, and certain other legitimate costs.
- Mortgage Interest and Section 24: Apply the 20% tax credit for your mortgage interest payments instead of a direct deduction if you own the property in your personal name.
- Personal Allowance: If your net taxable profit combined with your other income exceeds your personal allowance, you’ll pay income tax at the relevant rates (20%, 40%, or 45%).
- Corporation Tax: If you operate via a limited company, you will pay corporation tax on your profits, with rates varying from 19% to 25% depending on your company’s amount of profit.
- Capital Gains Tax: Selling a rental property might incur capital gains tax.
- Record-Keeping: Good records are vital to avoid mistakes and help claim tax relief properly.
Staying up-to-date with HMRC requirements is an ongoing process. The regulations and tax reliefs can shift, so it’s wise to seek professional advice if you are uncertain about your tax obligations.
Next Steps
If you require further help, consult a property tax accountant or tax professional for personalized advice. At MONEYSAFE, we assist landlords and businesses in meeting tax deadlines, optimizing allowances, and keeping their tax bill as low as legally possible. Whether you are a new landlord learning the ropes of the rental business, a limited company looking to utilize capital allowances, or a property investor concerned about private residence relief, we can provide the support you need.
Here are practical steps you can take now:
- Organize Your Records: Start keeping all expense receipts, monthly rent logs, and relevant costs in a system that lets you quickly compile your data for the self-assessment tax return.
- Set Aside Funds for Tax: As you collect rent, remember to reserve an amount for your annual tax bill, so you are not caught unprepared at the end of the tax year.
- Review Your Financing: If you are significantly affected by Section 24, consider whether transferring ownership to a limited company or restructuring your mortgage might be beneficial.
- Stay Informed: HMRC updates guidelines, so watch out for changes to rates, thresholds, and potential new relief measures.
This comprehensive guide highlights key considerations, but every situation is unique. For tailored advice, consult with an accountant or tax advisor who specializes in property matters. Being proactive can save you both money and time—and help you confidently manage your rental income in the UK.
