Paying Tax on Rental Income

How much tax you owe on your rental income depends on your profit and individual situation. In this guide, we discuss how to pay your rental income, how to calculate your tax, and other income tax related issues.

When Should I Report Rental Property Income?

You’ll need to declare your rental income to HM Revenue and Customs (HMRC) before the deadline on the year it’s due. The current tax year began on 6 April 2016 and will end 5 April 2017.

You’ll need to report rental property income on your Self Assessment tax return if it’s:

  • £2,500 – £9,999 after allowable expenses

  • £10,000 before allowable expenses

If your total earnings are less than £2,500, HMRC may be able to collect your taxes through the PAYE system. For more information, contact their help line.

Also note that there are different rules you must follow if you are renting out:

How Do I Calculate My Rental Income?

You pay tax on all taxable rental profit you’ve earned from your rental property. To calculate this profit, simply:

  • Add together your rental income

  • Add together your allowable expenses

  • Deduct your allowable expenses from your income to determine your profit or loss

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

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Rental Income includes:

  • Rent money

  • Utility costs (e.g. heat, water, etc.)

  • Fees for cleaning of communal space

  • Parking fees

  • Additional fees for the use of furniture

Note that services not normally provided by landlords, such as regular meals, cleaning services, and laundry services, should be claimed separately as trading income instead of rental income.

Allowable Expenses include:

You can claim the following expenses against your rental income, assuming that they were incurred wholly and exclusively for the purpose of renting out your property:

  • Insurance (including Landlord Insurance)

  • General property repairs and maintenance

  • Water rates, council tax, gas & electricity

  • Interest on the mortgage used to buy the property

  • Letting agent/management fees

  • Accountant’s fees

  • Legal fees for lets less than a year old or for renewing a lease less than 50 years old

  • Rents (if you’re 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)

Note that home improvement costs, the full amount of your mortgage payments, private phone calls, clothing, and personal expenses are all NOT considered to be allowable expenses.

What Are the Tax Rates on Rental Income?

Rental profits are taxed the same as business income, which means you pay more or less depending on which band you fall into. The HMRC defines income tax bands as follows:

Band Taxable Income Tax Rate
Personal allowance £11,000 or less 0%
Basic rate £11,001 – £43,000 20%
Higher rate £43,001 – £150,000 40%
Additional rate £150,000 or more 45%

 

What Taxes Do I Pay If I Sell My Property?

You’ll need to pay capital gains tax (CGT) on any secondary residential property you want to sell. Currently, any CGT you owe from the sale of property is payable from 31 January to the end of the tax year. However, as of 2019 your CGT will be due within 30 days of selling your property.

Current CGT tax rates on residential properties:

  • 18% for basic rate taxpayers.

  • 28% for higher rate or additional rate taxpayers

How Do I Report Undisclosed Rental Income?

If you’ve ever neglected 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.

Note that the HMRC is making a targeted push to end tax evasion by residential landlords. While disclosing missed payments now 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.

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