Try for free

Start Free Trial
Rental Accounting

A Landlords Guide to Tax on Rental Income

When it comes to working out your end of year tax for your property income things can get a little complicated. You need to know what counts as rental income. what costs are deductible and which aren’t, which tax bracket you’re in, and potentially even contend with capital gains.

And true to fashion, the HMRC, whilst publishing a fair amount of documentation on the topic, haven’t made it entirely clear. Which is why we have collated all the information you need to know when it come to understanding tax on your rental income.

What Taxes Do Landlords Need to Pay?

Landlords pay income tax on any rental income. This tax for landlords has many names such as landlord tax, property income tax, buy to let income tax. However, all of these refer to the same thing.
At the end of the year, landlords must declare the total net income from all their income sources.

Tax on rental income is worked out from the net rental income which is the profit that you make, calculated by adding together all the rental income you receive from various properties and then subtracting any allowable expenses.

It’s important to note that as MTD comes into effect all landlords with a gross income (not net) of over £10,000 pounds will be required to submit quarterly tax returns using a digital system.

For more information about buy to let allowable expenses visit our article here.

What Counts as Rental Income?

Essentially, any income from your rental property is taxable at your standard income rate.

Your rental income is primarily the rent you receive. However, it more broadly covers all payments from tenants – even if they are expenses and you make no money from them.

For example, you might offer a cleaning service that you outsource but the tenant pays through you. In this example, you would have to log the tenant payment as a rental income and then expense the cost.

Aside from the rentistself, rental income could include any of the following costs or fees associated with:

  • furniture usage
  • cleaning of communal areas
  • hot water
  • heating or other utilities
  • repairs.

All of the income from these classes need to be declared at the end of the year. However, many of these can be deducted as allowable expenses. So, it is important to keep accurate and detailed records of all the income, where it came from, and track your expenses with a tool like Landlord Studio to make sure that you do not end up overpaying your taxes.

If you charge a non-refundable deposit, this also will need to be counted as income as will any money that is kept to cover damages at the end of the tenancy from a returnable deposit. You will then add the costs of damages into your expenses afterwards.

What Are The Rental Income Tax Rates?

The landlord tax that you pay is determined by the rate at which you can pay your regular income tax for that year. Often, as a landlord, you will receive income from a variety of sources such as your regular job as well as investments, and your buy to let properties. You need to be meticulous when you calculate your total income if you want to work out exactly how much tax is due.

The income tax rates and thresholds for your rental income are the same as those of your personal income. However, be aware adding your net rental income to the other income you receive may push you over your usual tax threshold and into a new entire band.

The Income Tax rates are:

Income Tax Band Taxable Income 2020 – 2021 Income Tax Rate 2020 – 2021 Taxable Income 2021 – 2022 Income Tax Rate 2021 – 2022
Personal Allowance Up to £12,500 0% Up to £12,570 0%
Basic Rate £12,501 – £50,000 20% £12,571 – £50,270 20%
Higher Rate £50,001 – £150,000 40% £50,271 – £150,000 40%
Additional Rate £150,001 and above 45% £150,001 and above 45%

What Rental Income Is Taxable?

An example:

A landlord charges £1,000 pm in rent. This includes the tenant’s utility bills of £50/pm. This whole amount, despite a portion of it being paid straight to utility companies, would need to be logged as taxable income.

The costs to utility companies would then be added to your expenses and deducted at the end of the year.

If at the end of the tenancy, the tenant agrees to for £500 of their deposit to be used to cover repairs to the property, this would also count towards the rental income.

So the rental income might be £11,000 for the year. But you would include the utilities they pay of  £600 annually, plus the deposit that is kept to cover damages, in this case, £500. Making the total income you would declare for that tax year £12,100.

You would then deduct the utilities and repair costs as expenses against this declared income.

How And When Do You Pay Tax Due On Rental Income?

You must declare your rental income after the end of the tax year. The tax year runs from the 6th of April to the 5th of April.

The deadline for making a paper tax return is 31 October. For an online return the deadline is 31 January the following year.

From 2024 this will be changing as the Government pushes their new Making Tax Digital scheme to landlords and self-employed individuals. You will be required to keep digital records and submit quarterly returns as well as your end of year tax return.

The HMRC has made the process of declaring and paying tax for your buy to let propertyreasonably simple and it can all be done online. How exactly you need to go about it though depends on the amount of taxable income you receive.

  • Earn less than £1,000 a year in rental income then you don’t have to report it to HMRC
  • Earn between £1,000 and £2,500 a year in rental income then you need to contact HMRC
  • Earn between £2,500 and £9,999 after allowable expenses, or over £10,000 before allowable expenses, then you need to register with HMRC and complete a tax return that includes your rental income, as part of your yearly self-assessment

Buy-to-Let Allowable Expenses And Tax Relief

As we’ve mentioned already, landlords are taxed on the net rental income. The HMRC has strict tax rules on the income from rental property and there are limits as to what you can claim as an allowable expense.

The first thing to bear in mind is you have a £1,000 tax free property allowance. If you have less than £1,000 in rental income you don’t have to declare. If your rental income amounts to more than £1,000 though you must complete a self-assessment tax return.

You must also choose between receiving the property allowance or deducting the allowable expenses from your rental income. Generally speaking, if the expenses for your rental income equal more than £1,000 you are better off deducting the individual expenses. But if your expenses are lower than £1,000, then you can simply take the full property allowance, and get a slightly larger chunk of tax free income.

ReadA Landlords Guide to Fair Wear and Tear and Replacement of Domestic Item Relief

What Qualifies As A Deductible Expense For Rental Income?

There are five main categories of allowable expenses for buy to let property. These include:

  • General business expenses, such as your travel costs, including mileage, your phone and broadband marketing and letting agent fees.
  • Professional fees, such as your accountant fees, or the cost of surveyors to analyse
  • property service fees, such as cleaning decorating, or gardening costs
  • Repairs and maintenance. It’s important to note that any work on the property that improves the value of the property is not deductible and
  • Property charges, such as council tax and utility bills if you the landlord are paying for them.

Whilst many of the costs incurred running your rental property are allowable expenses, not all are some that aren’t include:

  • Improvements, as we have just mentioned
  • Restoration. This is when you buy a property and restore and restore it into a rentable condition. The cost of restoring it are not allowable, as they are seen as akin to improvements
  • Interest payments on financing loans. Under the 2017 section 24 tax changes, you are no longer allowed to claim tax relief on the interest of financing for buying a buy to let property. Instead, you get a tax credit of 20%.

Related Articles 

What Happens With Income From Multiple Properties?

If you have more than one property, all rental income and expenses can be lumped together. So expenses on one property can be deducted from the income as a whole not just against that property.

This becomes important if you declare a loss on a property. However, it’s important to note, that if you own properties personally, as well as a share of a company that profits from letting out properties these will be treated as separate rental businesses. You won’t be allowed to offset the costs of one against the other.

In a similar fashion if you own properties overseas these will be treated separately too. There’s a separate section in your tax return for declaring profits from overseas property.

The Best Way To Track Allowable Expenses And Reduce Tax On Rental Income

In order to accurately declare your net rental income for the year you need to have a good system in place to track your income and allowable expenses. Additionally, using a digital system like Landlord Studio will not only allow you to understand your taxes better but to gain a deeper, more nuanced overview of your financials as a whole, allowing you to optimise profitability and cash flow.

Landlords Studio is a property management software designed to help landlords track income and expenses. With it, you can connect your bank accounts and reconcile the income and expenses directly from your bank feed. You can digitise receipts, at the point of sale, and the system will automatically enter the receipt details as an expense for you, as well as allowing you to store the document, alongside that entered expense. Other features include automating tenant communications and instantly generating any of over 15 professional reports.

Find out more about Landlord Studio for income and expense tracking →

Reducing Buy-to-Let Taxes Through A Limited Company

There are some ways to reduce your tax burden, one of which is by setting your properties up under a limited company. Before doing this make sure to consult with a financial advisor to ensure that this will actually save you money as setting up a limited company comes with a variety of responsibilities and expenses.

When you set up a limited company for your rental income you no longer pay income tax, instead, you pay corporation tax. The HMRC doesn’t take your personal income into account when determining the rate at which you’ll be charged corporation tax as it’s a fixed rate.

Currently, corporation tax stands at 19% for the 2021-2022 tax year and is applied to your overall business earnings rather than the entirety of your income earnings.

There is also a little bit more flexibility with the expenses that you can claim on a limited company by to let since it’s considered a business rather than in that rather than an investment.

Read: Should You Invest In Property As A Limited Company

Filing Landlord Tax Returns

Landlords will be required to file a self-assessment tax return at the end of the year and declare all of their income and claim all of their allowable expenses, the HMRC will then use these figures to determine how much tax you need to pay, and how much National Insurance.

You must keep all the receipts and documentation for any claimed expenses or work you’ve had done on a property as the HMRC may request to view it. It’s important to note that this system is changing. And the HMRC will be rolling out making tax digital for all landlords, for the tax year 2024 all landlords, earning above £10,000.

You can learn more about Making Tax Digital here.

Rental Income vs Trading Income

If you provide a service that isn’t normally offered by a landlord this may be counted as a trading service. For example, you offer:

  • Room cleaning service
  • Laundry services
  • Meals

This income will be treated separately to the rental income.

If you run a B&B or Hotel then the whole of your income will be treated as a trading income. You can find out more here.

If you rent out a furnished room in your own home you can claim rent a room relief (even if you’re trading). Find out more about rent a room relief here.

Declaring Losses On Rental Income

If you declare a loss on your property’s income you can set that against future rental income tax.

For example, if, due to various deductible expenses and vacancies, your rental income comes to £6,000 for the year 2021-22, but your expenses come to £8,000 meaning you can declare a loss for the property of £2,000. 

The next year, 2022-23, you have increased occupancy and after expenses make a profit of £4,000. You could deduct the previous year’s loss from that income meaning you’d only have a total of £2,000 in taxable rental income for that year.

If in this example, you only made £1,000 of profit for the tax year 2022-23, you could carry the remaining £1,000 of losses over to the next tax year 2023-24 as well.

Paying Capital Gains Taxes When You Sell A Rental Property

When you sell a rental property you will usually have to pay capital gains tax (CGT). Different rules apply if the property has been your home.

The sale of your rental though will be treated in the same way as the sale of any other asset. As it stands you’ll currently either pay 18% (if you’re a basic-rate taxpayer) or 28% (if you’re a higher additional-rate taxpayer).

You will need to pay tax on any profits. For example, you bought a house in 2010 for £150,000. And sold it in 2018 for £200,000, you would be liable to pay CGT on the £50,000 profit made.

However, capital gains taxes on the sale of property are expected to change yet again over the coming years so it’s a good idea to keep a close eye on this in the coming years.

Tax on rental income needs to be paid by 31st January online after the end of the tax year of the sale. For more details on capital gains tax, read our guide to capital gains tax on rental properties

Final Considerations

There are several other tax considerations when dealing with your buy to let properties. These include

  • Stamp Duty Land Tax. When you purchase a property in the UK valued above a certain amount you will be required to pay stamp duty. UK stamp duty is a one-off cost at the time of purchase and you pay the same stamp duty on a second home as you would on a buy to let investment property.
  • Council Tax. As a landlord, you will only pay council tax for your properties when they are vacant. Generally, it is the tenant’s responsibility. You can have a claim council tax as an allowable expense when you complete your self-assessment tax return.
  • Capital Gains Tax. This will be due upon the sale of a buy to let property. If you never sell your property, then you won’t have to worry about capital gains tax. You can find out more about capital gains tax on rental properties here.
Start Free Trial With landlord Studio

* Free 14 day trial. No card required. 

×

Start your free trial of Landlord Studio

Start Free Trial

Try Landlord Studio free for 14 days, no credit card required. Plans start from £5.99/month.