How much is tax on rental income?

As a landlord, you will have to consider the tax implications of letting property.

In this article, we will be focusing 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 also need to be aware of their future Making Tax Digital (MTD) obligations with HM Revenue & Customs (HMRC) which are scheduled to be phased in from April 2026. More guidance on this can be found here.

Paying tax on rental income

The Government charges income tax to help pay for public services. During the 2021/22 tax year the Government raised £225 billion from income tax alone.

To collate these funds, an individual must assess their tax position 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. 

An individual 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. Those 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 annual returns.

Alternatively, 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. 

Furthermore 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 the letting of a property, they will need to consider whether this is assessable as gross income for income tax purposes.

The following types of payments will be classified as income:

• rent payments, this could be weekly, monthly or yearly
• reimbursement of expenditure incurred, such as utility bills, repairs or cleaning costs
• non-refundable deposits
• money kept from returnable deposits

Once rental income for the period has been established, an assessment for allowable expenditure can be made.

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 incurring in relation to the letting business
• Costs of maintenance and repair work 
• Utility bills, such as, gas, electricity, water and council tax
• Insurance, for example, building and contents
• 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, consideration can be made to claim the property allowance instead. However, this will not be available to utilise on all receipts of rental income. 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 collated 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 has the potential to calculate their taxable profit by either using the cash basis or the accruals method. Most will adopt the cash basis for ease, however, a yearly assessment can be made as to what is more tax efficient.

Some landlords may also incur finance costs, such as mortgage interest. Relief for finance costs can also be obtained, but not as a deduction 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 one tax year are less than the personal allowance, you won’t pay income tax on the rental profit. Once you surpass the personal allowance, you’ll be taxed at the non-savings income tax rates on the profits you make. These rates will be dependent on the amount of income you receive.

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 2023, the following income tax rates will apply on your rental profits:

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%

You will note that the higher rate and additional thresholds have been reduced in comparison to earlier years, therefore meaning more income tax will be payable at the higher rates.  

Please be aware, if you are classified as a Scottish taxpayer, different non-savings rates will apply. Click here for HMRC guidance on the applicable rates.

To calculate the income tax rate applicable you will need to total up all your non-savings income. This will establish where the rental profit will fall in the income thresholds.

The following types of income are classified as non-savings income: 

• Employment income, such as salary, bonuses and benefits in kind
• Pension income
• Trading profits exceeding the trading allowance of £1,000
• Taxable state benefits
• Trust income
• Overseas income meeting the above criteria

Rental income tax calculator

If you need to make use of our tax calculator, you can download the TaxAssist app from either the Android or Apple store. There you’ll find a number of helpful resources to help you determine your tax liability for the year. 

Paying National Insurance on rental income 

When renting out a property, you’ll have to consider whether Class 2 National Insurance contributions (NICs) are payable on the profits you make

From 6th April 2023, Class 2 NICs are fixed weekly contributions of £3.45 and are paid through your self-assessment tax return.

Class 2 NICs will be payable if your rental profits exceed £12,570, the Lower Profits Limit (LEL), and you are classified as running a rental business. You will be classified as running a business if the following conditions are being met:

• your main job is being a landlord,
• more than one property is let and
• you are buying additional properties to let.

If your profits are less than the Small Profits Threshold (SPT) of £6,725 you can now choose if you would like to make voluntary Class 2 NICs. Where your profits are between £12,570 and £6,725 (the LEL and SPT) you are deemed to have paid Class 2 NICs even without making a payment. This allows individuals to obtain a qualifying year for their NIC record without incurring the cost. For more information regarding voluntary contributions click here.

To assist the assessment on whether Class 2 NICs are payable, HMRC have a three tier test. This is not part of legislation or case law but provides a really useful outline. For more guidance on these tiers click here.

Buy-to-let mortgage tax relief

Previously, borrowing money through a buy-to-let mortgage had income tax advantages for landlords. However, from 6th April 2017 phased changes have resulted in finance costs no longer being deductible against income on long term let residential properties. Individuals will instead receive a 20% tax credit on allowable finance costs incurred during the year. This providing income tax relief by way of tax reducer.  

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 consolidate your income and expenditure to calculate your taxable profit arising for a tax year.

However, individuals owning property in both the UK and overseas will need to keep this income and expenditure separate. Effectively you need to treat this as two separate rental businesses for income tax purposes. Furthermore, 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 certainly aid with reporting and delivery of information if an accountant is dealing with your affairs.

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 to obtain the necessary Unique Tax Reference (UTR) number. For taxpayers not in the self-assessment system this registration will need to be completed by 5th October following the end of the tax year.

Once registered, a self-assessment tax return and supplementary pages can either be submitted electronically or on paper. Each option has different deadlines and these will need to be met to avoid any penalties being charged.

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.

By submitting your tax return electronically, this will firstly allow you more time to submit and the HMRC software will also calculate the necessary liability or repayment due.

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

When do you pay income tax?

Where a liability has arisen an individual will need to pay the outstanding tax by 31st January following the end of the tax year. This is the same deadline as the electronic return submission.

If you are required to make payments on account towards your income tax liability you will have an additional payment date to consider.

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:

An individual has an income tax liability for the year ended 5th April 2023 of £5,000. They have not made payments on account towards this liability and are required to make payments on account for the next tax year (2023/24). They will be required to make the following income tax payments for the 2022/23 and 2023/24 tax years:

 

Tax year and payment	Payment due date	Amount payable
2022/23 balancing payment	31st January 2024	£5,000
2023/24 - 1st payment on account	31st January 2024	£2,500
2023/24 - 2nd payment on account	31st July 2024	£2,500
2023/24 – balancing payment	31st January 2025	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.

As highlighted 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 duly need to be submitted highlighting 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 even 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 arising 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 realise a capital 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.

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. Get in touch with our team today.

 

Date published 18 Apr 2023 | Last updated 20 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.