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 £12,500 for the 2020-2021 tax year. 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 2020/2021 tax year, from 6 April 2020, are as follows:
- Higher rate tax band (taxable income of £50,001 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 £12,500 is tax-free, so you will only pay 20% tax on the remaining £2,500, which comes to £500.
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.