How to Calculate Rental Income

Wondering whether or not you can expense the new countertops you had installed in your rental home or the cup of coffee you bought for your tenant? This guide lists common allowable expenses and will help you calculate your rental income.

How to calculate net rental profit on your property lettings

To determine the net profit or loss of your rental properties:

  1. Add together your rental income from ALL of your properties.*
  2. Add together your allowable expenses from ALL of your properties*
  3. Subtract your allowable expenses from your rental income.

*Note: rental income on foreign property needs to be declared separately as foreign income.

You should also know:

  • You’re allowed to deduct expenses on one property against the receipts on another. You must pay tax on any profit.
  • You have to apply for a Class 2 National Insurance if being a landlord is your main job, you rent out multiple properties, and your profits are over £5,965 per year.

How to calculate rental income

Your rental income consists of the rent you receive from your tenants plus any funds you receive for covering various service charges.

Depending on the tenancy agreement, your rental income could include:

  • Rent for the letting of your property (e.g. houses, flats, apartments, office space, etc.).
  • Permits associated with your property (e.g. parking permits, sporting rights, etc.).
  • Fixed service charges (e.g. fees for maintaining communal areas, utility charges, etc.).
  • Variable service charges (e.g. arranging property repairs).
  • ‘Sinking’ funds (e.g. slush fund for emergencies, unexpected structural maintenance, etc.).
  • Easements allowing your tenant to use your property in a specific way.
  • Sums received for the use of furniture, furnishings, etc.
  • Reverse premiums and deemed premiums.
  • Property insurance.

If you are paid for any services that a landlord does NOT normally provide (e.g. regular laundry services, house cleaning, meals, etc.), this income should be treated separately, as trading income instead of rental income.

Note: you’ll need to consult your tenant if your service charges require your tenant to pay more than £250 for planned work or £100 per year for ongoing work (lasting more than 12 months).

How to determine allowable expenses

You can offset some of your rental property’s costs by claiming any expenses you incur wholly and exclusively for your rental property.

Alternatively, if you incur an expense that is only partially for your rental property, but you are able to calculate a definite proportion used wholly and exclusively for your property business, you are able to deduct that proportion. For more information, see the HMRC’s Business Income Manual.

Quick reference table for allowable expenses:

Can be claimedCannot be claimed
Home maintenance costs Home improvement costs
Interest on mortgage and loans used to repair the property Full cost of mortgage or loans used to repair the property
Management fees paid to a letting agent, rent collector, etc. Management fees paid to you (the landlord) for your labour
Misc. household costs (e.g. advertising) Misc. personal costs (e.g. clothing)
Ground rent Capital expenditures
Service charges (including utility bills)  
Accountant fees  
Vehicle running costs  
Council Tax  
Insurance (including Landlord Insurance)  

Additionally, you may be able to claim:

  • Capital Allowances –You can claim capital allowances on furnished holiday homes and commercial properties, provided you meet certain requirements.

  • Wear and Tear Allowance – If your residential letting is furnished, you can claim 10% of the net rent as a “wear and tear allowance.” Net rent is the total rent received less costs a tenant usually pays (e.g. Council Tax) have been deducted.

How to calculate tax on rental income

To calculate how much tax you owe on your rental income:

1. First, calculate your net profit or loss:

Rental Income - Allowable Expenses = Rental Profit

2. Second, deduct your personal allowance:

Rental Profit – Personal Allowance = Total Taxable Rental Profit

Allowances2019-20202019-20182017-20182016-2017
Personal Allowance* £12,500 £11,850 £11,500 £11,000
Income limit for Personal Allowance* £100,000 £100,000 £100,000 £100,000

*If you were born before 6 April 1948 you may be entitled to a bigger Personal Allowance. For more information visit GOV.UK: Income Tax Rates and Allowances.

3. Finally, calculate your tax rate for the current year.

Total Taxable Rental Profit x Income Tax Rate (%) = Tax Owed on Rental Profit

See HMRC’s current income tax bands.

Example:

It is the 2019 – 2020 tax year, and Sarah is a basic rate taxpayer who has made £15,000 in rental income with £2,000 in allowable expenses. How much tax does she owe?

  1. £15,000 rental income - £2,000 allowable expenses = £13,000 rental profit
  2. £13,000 rental profit - £12,500 personal allowance = £500 total taxable rental profit
  3. £500 total taxable rental profit x 20% basic rate income tax = £100 tax due

Sarah therefore owes £100 on her rental profit for the 2019-20 financial year.

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 landlord 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 advice if required.

This is a marketing article by Towergate Insurance.

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