Tax on Rental Income

Paying tax on rental income is an important part of being a landlord in the UK. Whether you own one buy-to-let property or a portfolio of properties, it’s vital to know how your rental income is taxed, what deductions you can claim, and how to reduce your tax bill legally. For accountants, understanding these rules allows you to help clients with accurate advice and find ways to save on taxes. For landlords, it means keeping more of your profits and avoiding penalties.

Why Understanding Rental Income Tax Matters

Rental income is classed as taxable income by HMRC. That means every landlord, regardless of the size of their property portfolio, has to declare it.

But how much tax you’ll actually pay depends on a few key things:

• How much rent do you earn in total?
• What expenses can you claim as deductions?
• Whether you own the property personally or through a limited company.
• Your other sources of income, which determine your tax rate.

Understanding these elements allows landlords to plan ahead and helps accountants provide better tax-efficient strategies for their clients.

What Counts as Rental Income

Rental income is more than just the rent your tenants pay each month. It includes:

• Regular rent payments.
• Any payments from tenants for services such as utilities or cleaning.
• Deposits you retain at the end of a tenancy (for example, if it covers damage).
• Income from furniture or fixtures in furnished lettings.

In simple terms, if a tenant pays you money in connection with the property, it forms part of your taxable rental income.

The £1,000 Property Allowance

The government provides a £1,000 property allowance each tax year. This is designed to simplify tax reporting for landlords with small or occasional rental income.

If your total rental income for the year is £1,000 or less, you don’t need to report it or pay tax.

If you earn more than £1,000, you can choose between:

• Deducting the flat £1,000 property allowance from your rental income, or
• Deducting your actual allowable expenses (if these are higher).

You cannot do both, so compare the options and choose whichever gives you the lower taxable profit. For accountants, this decision can make a meaningful difference when preparing client tax returns.

Deductible Expenses You Can Claim

If you choose to deduct your actual expenses rather than using the property allowance, you can offset a wide range of legitimate costs against your rental income.

Allowable expenses include:

• Letting agent and management fees.
• Repairs and routine maintenance (for example, fixing a leaky roof or replacing a broken boiler).
• Landlord insurance premiums.
• Utility bills, council tax, and ground rent (if you pay them rather than your tenant).
• Accountancy and legal fees relating to letting the property.
• Advertising costs for finding tenants.
• Stationery, travel, and office costs related to property management.

Expenses must be “wholly and exclusively” for the purpose of renting the property. Keep all receipts and invoices to support your claims.

However, improvements—such as adding an extension or upgrading to a luxury kitchen—are classed as capital expenditure and cannot be deducted from rental income. They may instead reduce capital gains tax when you sell the property.

Mortgage Interest and Finance Costs

Mortgage interest used to be fully deductible from rental income. However, the rules have changed. Individual landlords now receive only a 20% tax credit on their mortgage interest and other finance costs.

This means that:

• If you’re a basic-rate taxpayer, the change may not affect you significantly.
• If you’re a higher or additional-rate taxpayer, you’ll now receive relief only at 20%, not 40% or 45%.

For many higher-rate landlords, this has increased their tax bills, particularly for heavily mortgaged properties.

Limited companies, however, can still claim full interest relief as a business expense. This is why many professional landlords and accountants now explore company ownership as part of tax-efficient structuring.

Calculating Taxable Rental Profit: A Simple Example

Imagine you earn £18,000 in rent over the year and your allowable expenses total £4,000.

You’d calculate your rental profit as follows:

£18,000 (income) – £4,000 (expenses) = £14,000 taxable profit.

If you also paid £3,000 in mortgage interest, you’d get a 20% tax credit worth £600.

Your total tax due would then depend on your overall income, including any salary, dividends, or self-employed earnings.

How Rental Income Tax Rates Work

Rental income is added to your other income and taxed accordingly.

Every UK taxpayer has a personal allowance, which is the amount of income you can earn before paying tax. After that, you pay income tax at 20%, 40%, or 45%, depending on your total earnings.

For example:

If you already earn £45,000 from employment and make £10,000 profit from rental income, part of that rental profit will push you into the higher-rate bracket.

This is why proper tax planning is so important — especially for landlords with multiple income sources or who are close to the higher-rate threshold.

Owning Property Through a Limited Company

Holding property within a limited company has become a popular strategy for landlords.

The main benefits are:

• Companies pay Corporation Tax on profits, currently at 25%.
• Mortgage interest remains fully deductible.
• Profits can be retained within the company for reinvestment.

However, if you take profits out of the company as dividends, you’ll pay additional tax personally. There are also higher administrative and accounting costs to consider.

This structure often suits landlords with multiple properties, higher income levels, or long-term portfolio growth plans. Accountants can help model both personal and company ownership to decide which option provides better after-tax returns.

Declaring Rental Income to HMRC

You must report rental income to HMRC using the Self Assessment tax return system.

You need to register if:

• You earn more than £1,000 in rental income a year.
• Your rental profit (after expenses) exceeds £2,500.
• Your gross rental income exceeds £10,000 before expenses.

Key deadlines:

• The UK tax year ends on 5 April.
• Online tax returns must be filed by 31 January following the end of the tax year.
• The same date applies for paying any tax owed.

If you’re a new landlord, register for Self Assessment by 5 October after your first tax year of letting. Missing these deadlines can result in automatic fines and interest charges.

Record-Keeping and Documentation

Accurate record-keeping is essential for both landlords and accountants. You must keep evidence of:

• Rental payments and deposit transactions.
• Invoices for repairs, services, and maintenance.
• Mortgage and loan statements.
• Tenancy agreements and insurance documents.

Keep these records for at least six years in case HMRC requests evidence of your calculations or challenges your return.

Smart Tax Planning for Landlords

Here are key strategies to improve your tax efficiency:

1. Compare the £1,000 allowance with actual expenses each year to choose the most beneficial option.
2. Share ownership with a spouse or partner if one is a lower-rate taxpayer. Transferring part of the property can legally reduce the overall household tax bill.
3. Use a company structure for larger portfolios or high-rate taxpayers to access full interest relief and potential tax deferral.
4. Claim all allowable expenses – even small costs like travel to the property add up.
5. Plan for Capital Gains Tax (CGT) when selling property. Keep detailed records of purchase and improvement costs to reduce CGT later.

Common Mistakes to Avoid

• Confusing capital improvements with repairs.
• Forgetting to report small rental income amounts.
• Missing Self Assessment deadlines.
• Failing to set aside funds for tax payments.
• Ignoring how rental profits might push you into a higher tax band.

For accountants, reviewing client files early can identify these problems before they attract HMRC attention.

What’s Changing in the Future

The tax landscape for landlords continues to evolve. Upcoming developments include:

• The gradual rollout of Making Tax Digital (MTD) requires digital record-keeping and quarterly updates.
• Possible inclusion of National Insurance on rental income.
• Adjustments to corporation tax and dividend rates.

Staying informed allows both landlords and advisers to adapt quickly and avoid unexpected tax costs.

For landlords, the objective is clear and straightforward: to ensure their rental business not only remains profitable but also complies with all relevant regulations and laws. This requires a keen understanding of market trends and management strategies to optimise revenue while minimising risk. For accountants, the focus shifts to empowering their clients with insights and guidance that facilitate smart, forward-thinking decisions. They aim to help clients cultivate and enhance long-term wealth, fostering a secure financial future through strategic planning and comprehensive risk assessment.