Tax on Rental Income | Relief and Other Landlord Liabilities

Written by: Liez Comendador
Written by: Liez Comendador
Rental Income

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The amount of tax on rental income you pay relies primarily on your taxable rental income for the year and the nature of your employment. We cover all that and more in this guide, including the types of taxes every UK landlord constantly deal with or a certain point and other tax advice bonuses.

What Is Rental Income?

Rent income is the earnings collected from tenancy for the use of space and other relevant services.”

Rent income is the amount earned from property ownership for allowing another individual/business entity to use their property. This income incorporates anything from advance rent payments, late payments, to current payments. Additionally, the income you receive for renewing a lease, cancelling residence, and relinquishing security deposit are considered rental earnings.

Your rental income does not only come from the rent money paid by tenants but also from these sources:

  • Utility costs (e.g. gas, electricity, water)
  • Pay for cleaning of communal space
  • Parking fees
  • Additional payments for the use of furniture

Anyone can earn rental property income in England. Usually, the most common types of landlords, whether in the form of incorporated businesses or individuals, include but do not limit to the following:

What Kind of Taxes Do Landlords Pay?

Rental profit taxes are generally paid through self assessment tax return, applicable to people under self employment, and are deducted with legitimate rental expenses first. Moreover, the type of tax on rental income you pay depends on your employment status. Rental property income is subject to any of the tax liability below:
  • Corporation tax
  • Income tax
If you run a full property rental business or in a partnership, letting more than one property, and are registered under Companies House, you need to pay corporation tax on the rental profits. Otherwise, you will normally pay income tax on your property lettings income tax return, whether you are an accidental landlord, a seasoned buy to let landlord, or just renting within several number of days in a year through holiday lettings.

What Other Tax Responsibilities Homeowners Have?

Rental Income Tax Rates

Other tax responsibilities a UK resident owning a home may deal with include: 

  • Council tax  
  • Capital gains tax 

Council tax obligations are shouldered by the tenant unless the rental property is unoccupied, in which terms the landlord will have to pay. You will also pay capital gains tax (CGT) for a successful sale of a home, in which capital gain is added on top of an individual taxpayer or trade income. Buy to let property businesses pay capital gains tax upon selling and council tax upon buying a property and ownership.  

How Much Tax Do I Pay on Rental Income?

How much do I pay on Rental Income?

The amount of tax you pay as a landlord relies on your circumstances. All taxpayers have their unique tax position and tax implications. This section explores the rental tax rates for the 2024/25 tax year. 

  • Income Tax 

HMRC will see different rental properties as one property business and appropriately determine your tax amounts. Residential property rental income is the same as the standard income tax bracket. 

“As a landlord, you have income tax liability on your rental net income, which is your total income minus any deductible expenses from your rental.” 

For the 2024/25 tax year, the tax free property income allowance is at £12,570. If your property business makes less of this property allowance value in a tax year, you will not need to register with HMRC for self assessment. Registration is required for someone who earns excess from the thresholds for income tax purposes. 

For the current year, you will pay tax as follows: 

TAX BANDS TAXABLE INCOME TAX RATES
Basic Rate
Between £12,571 and £50,270
20%
Higher Rate
Between £50,271 and £125,140
40%
Additional Rate
More than £125,140
45%
The above rates are frozen until 2028. Scotland’s income tax does not share the same tax rules, however. To come up with an accurate result of your tax obligations and the relief you are able to claim, let a tax adviser do the job on your behalf, regardless of your accounting ways (accrual or cash basis). They can navigate any income tax calculator tool available in the country.
  • Corporation Tax
The new corporate tax legislation took effect beginning 1 April 2023, which means a rental company earning more than £50,000 will pay 25 per cent instead of 19 per cent. Small businesses with a record of current and future profits of less than £50,000 will pay the rate of 19 per cent. There is no more tax free profits threshold. For more information, see the table below:
TAXABLE INCOME TAX RATES
Less than £50,000
19%
Between £50,000 and £250,000
25%
More than £250,000
25%
Whilst there may not be a starting savings allowance rule for companies, many of them are eligible for marginal relief and full expense (100 per cent) property allowance on their capital expenditure. To arrive at accurate tax bill results, use a reliable tax calculator or seek help from tax experts.

What Are Allowable Expenses?

Rental Income Tax Threshold

A few rental expenditure can be taken into account for income tax relief deductions. These running costs generally include the following areas, to name some:

  • Professional charges (e.g., management fees, legal or accountants’ wages, letting agent fees)
  • Service charges
  • Ground rents
  • Utility bills (e.g., energy, water rates, etc.)
  • Council tax
  • Property repairs and maintenance (e.g., broken window, heating, etc.)
  • Landlord, building, or contents insurance

Disclaimer: Information above is not an exhaustive basis for the relief criteria. Allowable rental cost may include other direct costs related to renting your property, such as stationery, phone calls, internet, and video advertising.

Rental costs landlords cannot claim relief for include the price for making major changes in their buildings, such as adding systems and spaces that did not exist before. Their main tax relief source is on rental repair and maintenance costs, which the latest HMRC one to many letters targeted.

Mortgage interest payments are no longer a part of the deduction since April 2020 when the mortgage interest relief restriction rules were implemented. This meant 75 per cent less tax advantages on finance costs (e.g., interest element of mortgage payment). Individuals with mortgages or rental finance costs will only benefit from the basic tax reduction of 25 per cent.

However, the replacement of domestic items relief policies is still in place, which supports landlords for their provision of certain domestic property purchase items, such as a few kinds of furnishings, kitchen equipment, and more. Capital allowances do not apply to everyone. Find out if you are eligible for the relief with the help of Legend Financial.

Allowable rental costs can be one of the most confusing things when claiming for property allowance relief. To ensure you state the right items in your tax return claim pages, contact our tax experts for assistance. Be sure to provide adequate evidence of your cost records (e.g., receipts, invoices, etc.), alongside your rental profits and other income sources (e.g., salary, dividends shares, asset sales, etc.).

When Should I Report Tax on Rental Income?

You need to report your rental income to HMRC before the deadline, following the end of the tax year.

The tax year will start on 6 April each year and will end on 5 April the next year. However, the deadline for tax returns completion is not until 31 January the year after.”

If your total lets of a year is worth less than £2,500, you may make your income tax contributions through the Pay as You Earn (PAYE) system. To be sure, reach HMRC landline. Some landlords with a number of complex situations, such as leasing a specific room in their home, extending a lease for less than 50 years, renting as a separated civil partner or spouse, letting out a property in the UK whilst living abroad, may need additional guidance.

What Are Rental Property Losses?

Property loss happens when your expenses are greater in comparison to your income. The top way to mitigate the impact of losses is carrying them forward. For instance, in one year or less, you earned £10,000 and had allowable costs of £12,000. You would have a profits deficiency of £2,000 in that tax year as you cannot counterbalance this against your tax bill from different kinds of revenue in that same year. The best idea is to carry the loss forward instead.

How Legend Financial Can Help

Tax on rental income is very tricky to calculate, as many landlords get confused about which allowable expenses to include in self-assessment and many other aspects. Just recently, HMRC found out a lot of landlords made various errors in their 2021/22 tax relief claims. There is no penalty for the mistake, just a window of time for amendments. Legend Financial will help you on this matter and many other tax affairs. Reach us today! 

References

Author

  • Faizan Rashid

    Faizan is a well-qualified accountant with a firm belief in a team environment, working to deadlines, is usually absolute as tax return deadlines are non-negotiable. He is highly regarded and the most experienced professional of Legend Financial.

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Faizan Rashid
Faizan Rashid
Faizan is a well-qualified accountant with a firm belief in a team environment, working to deadlines, is usually absolute as tax return deadlines are non-negotiable. He is highly regarded and the most experienced professional of Legend Financial.

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