How to Calculate Tax on Rental Income

If you own a property in the UK and rent it out, you are legally required to pay tax on the rental income you receive. Many landlords are unsure how to calculate their tax correctly, especially with ongoing changes to property tax rules. Understanding the process step by step helps you stay compliant, avoid penalties, and plan efficiently for your tax liabilities.

In this article, we will explain exactly how to calculate your tax on rental income — from identifying taxable income and deducting allowable expenses, to applying the correct tax rates and allowances. By the end, you’ll know how much you really owe and how to legitimately reduce it.

Understanding What Counts as Rental Income

The first step in calculating your tax is identifying what HMRC classifies as “rental income.” It’s not just the rent your tenant pays each month. It also includes:

• Any additional payments tenants make for services such as cleaning, heating, or gardening.
• Rent received in advance.
• Income retained from a tenant’s deposit if it is not returned.
• Fees for using furniture or equipment provided with the property.

If you receive any form of payment connected to your property rental, it’s generally considered taxable income.

The Property Income Allowance

Before you start calculating expenses and taxes, there’s an important allowance to be aware of.

Every individual landlord can earn up to £1,000 per year in rental income tax-free under the Property Income Allowance. If your rental income is below this threshold, you don’t have to report it to HMRC.

However, if your income exceeds £1,000, you have two options:

1. Use the property allowance – deduct the £1,000 from your total rental income.
2. Deduct your actual allowable expenses – if your expenses are higher than £1,000, this route will usually save you more tax.

You cannot claim both, so it’s essential to choose the option that gives the best result for your circumstances.

Calculating Your Net Rental Profit

The key principle of rental income tax is that you pay tax on profit, not the total income received.

Here’s how to calculate your net rental profit:

Step 1 – Work out your gross rental income

Add up all the rent and other payments received from your tenants during the tax year (6 April to 5 April).

Step 2 – Deduct allowable expenses

Allowable expenses are costs you incur wholly and exclusively for renting out your property. These can include:

• Letting agent and property management fees.
• Legal and accountancy fees related to letting.
• Insurance premiums for landlord, buildings, or contents cover.
• Maintenance and repairs (but not home improvements).
• The landlord pays utility bills, water rates, and council tax.
• Cleaning and gardening costs.
• Advertising and marketing costs for finding tenants.

Once you’ve subtracted your allowable expenses, you’ll arrive at your net rental profit. This is the figure you’ll pay tax on.

Step 3 – Adjust for mortgage interest (if applicable)

Mortgage interest used to be fully deductible from rental income, but that rule has now changed. You can no longer deduct mortgage interest as an expense. Instead, you receive a 20% tax credit on your mortgage interest payments.

For example, if you pay £10,000 in mortgage interest, you can claim a tax reduction of £2,000 (20% of £10,000).

Applying Tax Bands and Allowances

Once you’ve calculated your rental profit, it is added to your other income for the year, such as salary, pensions, or self-employed income. The combined figure determines which income tax band you fall into.

For the 2024/25 tax year, the bands are:

• Up to £12,570: No tax (personal allowance)
• £12,571 to £50,270: 20% (basic rate)
• £50,271 to £125,140: 40% (higher rate)
• Above £125,140: 45% (additional rate)

If you already earn a salary, your rental profit may push part of your income into the next tax band. This means you might pay 40% or even 45% tax on some or all of your rental profit.

Example: Suppose your total income is £80,000, including £30,000 from rent. The first £12,570 of income is tax-free. The next portion is taxed at 20%, and the higher portion at 40%. You’ll also get a 20% tax credit for any qualifying mortgage interest payments.

Reporting Your Rental Income

If your rental income exceeds £1,000, or you’ve chosen to deduct expenses rather than use the allowance, you must register for Self-Assessment and submit a tax return each year.

You will need to declare:

• Total rental income for the tax year.
• All allowable expenses.
• The resulting profit (or loss).

The online submission deadline for your Self-Assessment tax return is 31 January following the end of the tax year. Payments for any tax owed are due on the same date.

If you fail to file on time or underreport your income, HMRC can issue penalties and charge interest on late payments.

Dealing with Rental Losses

Not every landlord makes a profit every year — and that’s okay.

If your allowable expenses exceed your rental income, you make a rental loss. HMRC allows you to carry this loss forward and offset it against future rental profits from the same property business.

This means you can reduce your tax in future years when your property becomes profitable again.

Rent a Room Scheme

If you rent out a furnished room in your own home rather than a separate property, you might qualify for the Rent a Room Scheme.

This allows you to earn up to £7,500 per year tax-free from letting furnished accommodation in your main home. If you share the income with someone else (for example, a partner), you each get £3,750 tax-free.

You can either claim this allowance or deduct actual expenses — whichever is more beneficial.

Multiple Properties and Company-Owned Properties

If you own multiple rental properties, you calculate the income and expenses from all of them together to determine your total profit or loss for the tax year.

If you own properties through a limited company, the calculation process is different. Instead of income tax, your company pays corporation tax on its profits. You may then pay additional tax personally when drawing dividends from the company.

For many landlords with growing portfolios, incorporating can offer tax advantages, but it also entails additional administrative responsibilities. A professional accountant can assess whether this is right for you.

Common Mistakes Landlords Make

Landlords often make avoidable errors when calculating their rental income tax. The most common ones include:

• Forgetting to declare rental income or report it late.
• Not keeping records of all allowable expenses.
• Treating property improvements (capital expenses) as repairs (revenue expenses).
• Claiming full mortgage interest instead of the new 20% tax credit.
• Ignoring how rental income affects personal tax bands.
• Overlooking the ability to carry forward rental losses.

Keeping accurate, detailed records throughout the year prevents these issues and ensures you claim every deduction you’re entitled to.

Why Accurate Calculation Matters

Accurate rental income tax calculation is essential for three main reasons:

1. Compliance: HMRC expects landlords to report income and expenses accurately. Mistakes can lead to fines or investigations.
2. Tax efficiency: By recording all legitimate expenses, you reduce your taxable profit and keep more of your earnings.
3. Planning: Knowing your exact rental profit helps you plan future investments, manage cash flow, and assess whether incorporating your property business could save tax.

Landlords who calculate their tax properly not only avoid penalties but also gain valuable insight into the profitability of their property investments.

Calculating tax on rental income can seem complex, but understanding income, expenses, and allowances makes it straightforward. Keeping accurate records and reviewing your figures before filing is essential. If you have multiple properties or complex finances, seeking professional advice is wise.

At Tax Accountant, we help landlords and property investors calculate taxes, file returns, and manage portfolios tax-efficiently. Whether you’re a first-time landlord or own multiple properties, our experts ensure compliance while maximising profits.