A Landlord’s Guide to Paying Tax on Rental Income

There are three main types of tax in the UK: income tax, National Insurance and VAT. If you’re letting out one or two properties while in full-time employment, you will probably only need to pay income tax on the profit you make from renting your property to a tenant.

As a landlord, your tenant is liable for paying council tax, but this becomes your responsibility if the property becomes unoccupied.

If you are a full-time landlord, you need to declare to the HMRC that you are starting a business – in which case, you will be taxed differently.

How much tax do you pay on rental income?

When you rent a property to a tenant, you pay tax on any profit you make from rental income that is not covered by your personal allowance, which is set at £12,570 for the 2021-2022 tax year, and the same for tax years up to and including 2025-26. The amount of tax that you pay depends on which tax band you fall into.

You can calculate your profits by adding together your rental income and deducting any allowable expenses from this total.

Your rental income includes any money made from sources such as:

• Rent money paid by tenants
• Utility costs (e.g. gas, electricity, water)
• Fees for cleaning of communal space
• Parking fees
• Additional fees for the use of furniture

It does not include money from services which are not normally provided by landlords, such as regular meals, cleaning services and laundry services. These should be claimed separately as trading income instead of rental income.

When calculating your rental profit, you can lump any rental receipts and expenses together, which means you can claim one property’s expenses against another property’s income. The exception to this is overseas properties, which you may need to report separately as foreign income.

The income tax rates for the 2021/2022 tax year, and years up to and including 2025-26, are as follows:

• Higher rate tax band (taxable income of £50,271 to £150,000) = 40%
• Additional rate taxpayer (taxable income of over £150,000) = 45%

If you earn £15,000 from renting out your property, for example, the first £12,570 is tax-free, so you will only pay 20% tax on the remaining £2,430, which comes to £486.

See more information on the UK government website.

NB The HMRC’s tax bands are slightly different in Scotland.

However, presuming you also have a full-time job, your rental income will be added to your annual salary, which may skew what you pay in tax. In any case, the HMRC will work this out for you when you declare your income.

Allowable expenses for landlords

Landlords are entitled to certain tax relief. You can deduct the following expenses from your rental income, assuming they were incurred wholly and exclusively for renting out your property:

• Insurance (including landlord insurance)
• General property repairs and maintenance
• Water rates, council tax, gas and electricity
• Letting agent/management fees
• Accountant’s fees
• Legal fees for lets less than one-year-old or for renewing a lease less than 50-years-old
• Rents (if you are sub-letting), ground rents, and service charges
• Wages of hired help and other services
• Household costs (e.g. phone calls, stationery, advertising expenses)
• Vehicle running costs (you can claim the portion used solely for your rental business)

It is important to note that the following expenses are NOT considered to be allowable expenses for landlords:

• Home improvement costs
• The full amount of your mortgage payments
• Private phone calls
• Clothing
• Personal expenses

You should always keep copies of receipts for any expenses you claim. It is sensible to scan or even photograph these receipts and store them on your computer. The HMRC may ask for proof of any expenses, and has a right to demand them up to six years after you claim them.

When should I report rental property income?

You need to declare your rental income to the HMRC before the deadline following the end of the tax year. The tax year begins on 6 April each year and ends on 5 April the following year, but the deadline for online tax returns is not until 31 January the year after.

If it is your first year completing self-assessment, you need to register by 5 October in the year after you collected rental income.

You must contact HMRC if your income from property rental is less than £2,500 a year, but you must report it on a self-assessment tax return if it is:

• £2,500 to £9,999 after allowable expenses
• £10,000 or more before allowable expenses

If your total earnings from letting your property are below £2,500, HMRC may be able to collect your taxes through the PAYE system. For more information, you can contact their helpline. Otherwise, you will have to complete self-assessment.

Some landlords should follow different rules, such as if you are renting out a room in your home to a lodger or you are letting out a property in the UK while you live abroad.

Recent tax changes for landlords

Changes to buy-to-let tax relief in 2016 were phased in during 2017. In the past, higher rate taxpayers were able to effectively claim mortgage interest payments as an expense and thereby reduce their tax bill.

That is no longer possible, so some landlords have used different strategies to reduce their tax bills – from increasing rents to setting up companies.

What taxes do I pay if I sell my property?

You will need to pay capital gains tax (CGT) on any secondary residential property you sell where the gain you make is above your tax-free allowance for the tax year. However, from 2019, your CGT is due within 30 days of selling your property.

Capital gains tax rates on residential properties:

• 18% for basic rate taxpayers (in most cases)
• 28% for higher rate or additional rate taxpayers

How do I report undisclosed rental income?

If you neglect to report rental income to HMRC, you can inform them of this oversight through the Let Property Campaign. Visit the HMRC website for more guidance on making a disclosure and how to disclose your income.

The HMRC is making a targeted push to end tax evasion by residential landlords. While disclosing missed payments may result in penalties, you’ll face much higher penalties and possibly criminal prosecution if you fail to disclose your income and the HMRC finds out.

Landlord insurance from Towergate

We provide landlord insurance for a wide range of properties and tenants including multi occupancy, students, local authority placements, unoccupied and much more. See our landlords insurance page or call 0344 346 0409 for more.

Note: Every effort has been made to ensure the above information is correct at the time of this article going online, however, we recommend that you seek professional tax advice when reviewing your current tax and income position and future tax planning strategies.

About the author

Alison Wild BCom (Hons), MAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has over 20 years' experience as a residential landlord.