How much is tax on rental income?

In this article, we focus on the income tax implications for landlords. More specifically how you calculate the taxable profit for a rental business, how much tax you’ll pay and when.

Landlords must also be aware of their Making Tax Digital (MTD) obligations with HM Revenue & Customs (HMRC). For landlords with property income above £50,000, MTD will start from April 2026, for landlords with property income above £30,000, MTD will start from April 2027.

Paying tax on rental income

Landlords must assess their tax position for each year under self assessment. The tax year for the UK runs from 6th April to the following 5th April.

Landlords receiving rental payments from tenants will need to assess their income tax position and reporting requirements with HMRC. 

Landlords earning less than £1,000 rental income (before expenditure) will not be subject to income tax, as this will be covered by their property allowance. Landlords receiving gross income between £1,000 to £2,500 should contact HMRC to confirm their reporting requirements. However, where rental income of £2,500 or more is received registration for self-assessment will be required, along with the completion of self-assessment tax returns. If you let out a room in your main home, and live alongside your tenant, rent-a-room relief can be utilised. This allows an individual to earn up to £7,500 per tax year tax free.

An individual that moves abroad and lets out their UK residential property will need to consider their income tax reporting requirements. Potentially, a non-resident status will be met and therefore income tax can either be collected at source from rental income or a self-assessment tax return can be submitted. More guidance on reporting for those individuals can be found here.

You can check whether you need to complete a self assessment tax return on the HMRC website.

How does tax work on rental income?

When a landlord receives a payment from letting a property, they need to consider whether this is income for income tax purposes. The following types of payments will be classified as income:

• rent payments
• reimbursement of expenditure, such as utility bills, repairs or cleaning costs
• non-refundable deposits
• money kept from returnable deposits

Once rental income has been calculated, you should then look at your allowable expenditure.

Expenditure incurred wholly and exclusively for the purpose of the rental business, which is not capital in nature, can be deducted against rental income. Capital means expenditure that enhances and improves the value of the property. 

The following types of expenditure can be deducted against rental income:

• Letting agent and professional fees
• Legal fees on lets of a year or less, or for renewing a lease less than 50 years
• Accountancy fees in relation to the letting business
• Costs of maintenance and repair work
• Utility bills, such as, gas, electricity, water and council tax
• Insurance
• Rent, ground rent and service charges
• Advertising costs for new tenants
• Services such as cleaning or gardening
• Stationery, postage costs and telephone costs
• Costs of replacing domestic items

If the total expenditure for the year is less than £1,000, it may be advisable to claim the property allowance. However, if you receive rental income from the following sources the property allowance will not be available:

• a company which you or someone who is connected to you owns or controls
• a partnership which you or someone who is connected to you is classified as a partner
• your employer or the employer of your spouse or civil partner

Once you have calculated your income and expenditure, you can deduct the total allowable expenditure or the property allowance to calculate the taxable profit arising for the year.

A taxpayer can calculate their taxable profit using the cash basis or the accruals method. Most landlords will use the cash basis, but looking at which is more tax-efficient is recommended.

Some landlords may also have finance costs, such as mortgage interest, to consider. Relief for finance costs is not dedutible against income, instead an allowable amount is deducted as a basic rate tax deduction. For more information on how the mortgage interest relief restriction applies see here.

For commercial properties or properties classified as furnished holiday lets (FHL) the finance cost restriction rules will not apply. Instead, the costs are deductible against income. Guidance on the tax advantages of letting a FHL can be found here.

How much tax do you have to pay on rental income?

If your total earnings in the tax year are less than the personal allowance, you won’t pay income tax on the rental profit. Once your income is more than the personal allowance, you’ll be taxed on the profits you make.

Remember, if you receive rental income of £1,000 or less, this will be covered by the property allowance and income tax will not be payable. This is regardless of whether or not you earn income above the personal allowance.

From 6th April 2024, the following income tax rates will apply on your rental profits.

For England and Wales:

Income tax band	Taxable income	Tax rate
Personal allowance	Up to £12,570	0%
Basic rate	£12,571 - £50,270	20%
Higher rate	£50,271 - £125,139	40%
Additional rate	Over £125,140	45%

For Scotland:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Starter rate	£12,571 to £14,876	19%
Basic rate	£14,877 to £26,561	20%
Intermediate rate	£26,562 to £43,662	21%
Higher rate	£43,663 to £75,000	42%
Advanced rate	£75,000 to £125,140	45%
Top rate	over £125,140	48%

Paying National Insurance on rental income 

When renting out a property, you’ll have to consider whether National Insurance contributions (NICs) are payable on the profits you make. Since 6th April 2024, landlords with profits over £12,570 will no longer need to pay Class 2 NIC payments. Landlords with profits between £6,725 and £12,570 are also not required to pay class 2 NIC and those with profits under £6,725 can pay voluntary NIC. For more information regarding voluntary contributions click here.

Buy-to-let mortgage tax relief

Finance costs are no longer deductible against income on long term let residential properties. Landlords will instead receive a basic rate tax credit at 20% on allowable finance costs incurred during the year. More guidance on how relief can be obtained can be found on the HMRC website.

Rental income tax on multiple property lettings

If you own multiple properties in the UK you will need to add all your income and expenditure from each property together to calculate your total taxable profit arising for a tax year. Individuals owning property in both the UK and overseas will need to keep this income and expenditure separate as these profits will be reported separately on your self-assessment tax return. From a practical perspective, landlords should ideally be keeping their rental finances separate from their personal expenditure. This will help with reporting and delivery of information to your accountant.

How to pay income tax

Landlords are required to pay income tax through self-assessment.

Landlords who receive UK rental income but live outside the UK may have tax withheld at source by their letting agent or tenant. The rent is still taxable in the UK and HMRC will still require a UK self-assessment tax return to be submitted.

For a tax return to be issued, an individual will need to register for self-assessment, if this if your first time you must register by 5th October following the end of the tax year where you started to receive income.

Once registered, a self-assessment tax return can be submitted electronically or on paper. Those submitting a tax return electronically will need to ensure these are with HMRC by 31st January following the end of the tax year. If a paper return is submitted the return will need to be submitted by 31st October following the end of the tax year.

There are many ways which HMRC accept payment, a summary of which can be found here.

When do you pay income tax?

Where a a tax liabilty is due, the landlord will need to pay the outstanding tax by 31st January following the end of the tax year. If you are required to make payments on account towards your income tax liability you will have an additional payment date to consider of 31st July.

Payment on accounts will not be required where the following conditions are met:

• Your income tax liability for the year is less than £1,000 or
• You paid more than 80% of your previous year's tax liability at source, for example PAYE

An individual that is required to make payments on account will essentially be paying their income tax in advance. The due dates for payments on account are 31st January and 31st July for the relevant tax year.

The following example will help illustrate the payment dates for balancing payments and payments on account for a landlord with a tax liability of £5,000 for 2023/24, who is required to make payments on account for 2024/25.

Tax year and payment	Payment due date	Amount payable
2023/24 Payment	31st January 2025	£5,000
2024/25 1st payment on account	31st January 2025	£2,500
2024/25 2nd payment on account	31st July 2025	£2,500
2024/25 Balancing payment	31st January 2026	If necessary

Where payment deadlines are not met interest will accrue on the outstanding balance along with penalties potentially becoming payable.

Declaring losses

If your allowable expenditure is more than your rental income in a tax year, a loss for your property business will arise. These losses will be carried forward and offset against future profits you make on your rental business.

Where an individual owns property in the UK and abroad, these profits and losses are calculated separately. Therefore any losses arising in either of the UK or overseas property business will be kept separate and offset against future profits arising in each.

To notify HMRC of a loss, a self-assessment tax return will need to be submitted showing the loss to be carried forward. 

Taxes on selling properties to rent

When selling property, you will need to assess whether capital gains tax (CGT) is payable. This is especially necessary for disposals of properties that are buy-to-lets, not your main home, inherited property or business premises.

Individuals selling UK residential properties will need to be aware of the additional reporting requirements set out by HMRC. UK resident individuals must report and pay any CGT on the sale of UK residential property within 60 days of completion. More HMRC guidance on this can be found here.     

Non-resident individuals must report disposals of all UK land (not just disposals of residential property), whether or not they make a gain. This requirement also extends to disposals of shares in property-rich entities. More HMRC guidance on this can be found here.   

To assist with calculating the CGT position you can make use of HMRC’s CGT calculator.

How TaxAssist Accountants can help

TaxAssist Accountants offers a range of services for UK landlords and offers helpful tax support. Whether it’s help with your self-assessment tax return, advising on capital gains tax or even practical support with managing your property business, we can do it all. Call us now on 01257 277 999 or get in touch with our team today.

Last updated: 18th October 2024