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The amount of tax you pay on rental income relies primarily on how much profit you make, and what your work status is. In this article, we discuss the taxes that landlords face, the role of HMRC, and additional guidance for landowners.
In the UK, there are three fundamental taxes: Income Tax, National Insurance, and VAT. If you work full-time and are leasing multiple properties, you will likely only have to pay income tax on the profit gained from renting. In regards to Council Tax, the tenant of the property is the one liable to pay. However, should the property become empty, then it becomes your duty to pay as you are the property owner.
What Is Rental Income?
“Money collected from tenants for the use of space.”
How Much Tax Do I Pay on Rental Income?
“As a landowner, you are charged to tax on your net rental income, which implies your total income minus any ‘permissible costs.”
The tax positions for landlords are the same as the standard tax bands. These are:
- 0%: Within Personal Allowance
- 20%: Basic rate
- 40%: Higher rate
- 45%: Additional rate
What Are the Rental Income Tax Rates?
- Your Income Tax band decides the rate at which you’ll pay tax on rental income that year.
- 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.
- Keep in mind that income tax accounts for both rental income and any other income. For example, if your rental income is £15,000 and you work full time with a salary of £40,000, then this adds up to £55,000 and so you would belong in the 40% income tax band.
| Income tax band | Taxable income 2020/21 | Income tax rate 2020/21 | Taxable Income 2021/22 | Income tax rate 2021/22 |
|---|---|---|---|---|
|
Personal Allowance |
Up to £12,500 |
0% |
Up to £12,570 |
0% |
|
Basic rate |
£12,501 - £50,000 |
20% |
£12,571 - £50,270 |
20% |
|
High rate |
£50,001-£150,000 |
40% |
£50,271-£150,000 |
40% |
|
Additional rate |
£150,001 and above |
45% |
£150,001 and above |
45% |
If your income is:
- Less than the basic rate threshold of £12,570 – you’ll pay 0% in tax on rental income
- Above £12,570 and below the higher rate threshold of £50,270 – you’ll pay 20% in tax on rental income
- Above £50,270 and below the additional rate threshold of £150,000 – you’ll pay 40% in tax on rental income
- Above the additional rate threshold of £150,000 – you’ll pay 45% in tax on rental income
What Are Allowable Expenses?
HMRC allows you to get allowable expenses on the following:
- Professional fees; accountant, legal costs, agents’ fees
- Accountancy fees
- Ground rent
- Utility bills; energy, water
- Council tax
- Property Maintenance and Repairs
- Landlord insurance
For mortgage expenses, it can no longer be directly deducted in the tax bill (as a tax relief) starting April 2020. Instead, landlords will receive tax credit based on 20% of the mortage interest payment.
This is not an exhaustive list and includes other costs directly connected to renting your property, such as stationery, phone lines, internet, and advertising. It is essential to be clear about the details of the allowable expenses. For example, whilst you are allowed to deduct the cost of repairs and maintenance, this does not include any improvements to your property. Further details are available on our website (Legend Financial).
All allowable expenses are reported on your self-assessment tax return alongside your rental income.
How Much Do I Pay on Rental Income?
“You can compute your profits by including your rental income and deducting any reasonable costs from this aggregate.”
Your rental income incorporates any cash produced using these sources, for example,
- 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
When should I report Tax on Rental Income?
“On 6 April of every year, the tax year starts and closures on 5 April the next year. However, the deadline for online tax forms isn’t until 31 January the year after.”
If it is your first year finishing self-appraisal, you need to enroll by 5 October after gathering rental income.
You should contact HMRC if your pay from property rental is under £2,500 every year, except you should report it on an assessment tax return that it is:
- £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses
If your total income from letting your property is beneath £2,500, HMRC might have the option to gather your taxes through the PAYE framework. For more data, you can contact their assistance line. Else, you should finish the self-evaluation. Some landowners ought to seek additional guidance for more complex situations, such as leasing a specific room in your home to a tenant, or letting out a property in the UK while you live abroad.
What Are Losses on Rental Income?
If you begin renting the property this year, you should document this using a government form by 31 January 2023 at the most recent, which is likewise when you should cover your bill. In the event that you acquire more than £10,000, you should finish the tax return, or if your rental income is above £2,500 after costs. In the event that it’s underneath that sum, HM Revenue and Customs can deduct the duty. If you have more questions regarding buy-to-let property visit us at Legend Financial.
References
Gareth. (n.d.). inews. Retrieved from https://inews.co.uk/inews-lifestyle/money/what-are-the-tax-rules-for-renting-out-a-property-1066234
gov.uk. (n.d.). Retrieved from https://www.gov.uk/renting-out-a-property/paying-tax
House Of Commons Library. (n.d.). Retrieved from https://commonslibrary.parliament.uk/research-briefings/cbp-8867/
Legend Financial. (n.d.). Retrieved from https://www.legendfinancial.co.uk/blog/
Ruby. (n.d.). FT Advisors. Retrieved from https://www.ftadviser.com/mortgages/2021/07/05/fifth-of-btl-landlords-consider-exit/
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