To make things easier, we've answered the most common questions about tax on rental income in the UK:
If you're a landlord, you have to pay tax on any profit you make from renting out a property. How much tax you pay primarily depends on:
Your rental profit is calculated by deducting your allowable expenses from the amount of rental income you receive. In short: rental income - expenses = profits.
Your rental income is made up mainly of the 'rent' you charge for your property, but also includes charges for additional services you might offer, such as:
Below are some examples of landlord expenses you CAN deduct:
These allowable expenses should be incurred wholly and exclusively for the purpose of renting out the property. For example, you shouldn't buy floor tiles for the home you live in, and then claim them as an expense on your rental property.
However, if you purchased a bulk order of floor tiles and used some in the home you live in, and some in the rental property, you could claim part expenses.
It's worth keeping a copy of all your expense receipts, as Her Majesty's Revenue and Customs (HMRC) may ask for proof. Consider scanning or photographing them, before storing on a computer, hard-drive or cloud.
Below are some examples of the landlord expenses you CANNOT deduct:
Before April 2020, if you had a mortgage on your rental property, some of the interest you incurred could be included as an expense too. But that's all changed now. You can learn more about this here: What are the changes to buy-to-let tax relief?
Since 6 April 2017, if you rent out a property you are entitled to a property income allowance of £1,000 per year. Therefore, if your total rental income (before expenses), is less than or equal to £1,000, you don't have to declare it to HMRC. And you don't have to pay any tax on it. There are some exceptions to this, so it's always worth checking with HMRC.
If your annual income from property rental is between £1,000 and £2,500, you must contact HMRC. If it is between £2,500 and £9,999 after allowable expenses, or £10,000 or more before allowable expenses, you must also complete a Self Assessment tax return.
Unfortunately, there isn't a straightforward 'yes or no' answer to this. If you already complete a self-assessment tax return for another reason, e.g. you're a sole trader or a partner in a business, you have a duty to include your income from ALL sources on the return. This would include the income and expenses from any rental properties.
If you're not already required to complete a tax return, and your second property makes rental losses - you don't have to declare it. According to HMRC: 'If the allowable expenses are greater than your rental income you will have made a loss'.
If you have more than one rental property, the income and expenditure of all your properties are combined to give you an overall profit or loss for the year.
You might be one of the many landlords that isn't aware you need to declare your rental income to HMRC, but not declaring your rental income could prove costly. You could end up with a large back-dated tax bill. You could be fined. Or worse still, you could face a criminal prosecution.
HMRC has a range of resources at their disposal to identify incomes from rented properties. They can check tenant deposit registers and track data from letting agents and local authorities. HMRC also has data on landlords who receive tenants' housing benefit payments directly.
If you're unsure if you need to declare your rental income, it's always safer to double check with HMRC.
Making a profit as a private landlord today isn't as easy as it was several years ago. If you were a landlord before April 2017 and had a mortgage on your property, you could deduct all of your mortgage interest payments from your rental income. This would minimise your profit and potentially how much tax you paid.
You made £12,000 per year of rental income. Your annual mortgage interest repayments were £10,000.
So you would only get taxed on the £2,000 profit. If you were in the 20% tax bracket for your overall income, you would pay £400 in tax on your rental income.
After April 2017, a new buy-to-let tax system was introduced. It was phased in over several years, and is now fully in place.
As you can see from the table below, the percentage of your mortgage interest payments that you could deduct from your rental income, decreased by 25 per cent each year from April 2017. At the same time, the portion of those interest payments that qualified for the new tax credit increased by 25% each year.
| Tax year | Percentage of mortgage interest payments deductible from rental income | Percentage of mortgage interest payments qualifying for the new 20% tax credit |
|---|---|---|
| Before April 2017 | 100% | 0% |
| 2017-2018 | 75% | 25% |
| 2018-2019 | 50% | 50% |
| 2019-2020 | 25% | 75% |
| After April 2020 | 0% | 100% |
This means, you can no longer deduct any mortgage interest payments from your rental income before paying tax. Now, you receive a 20% tax relief on all of your mortgage interest payments.
You made £12,000 per year of rental income. Your annual mortgage interest repayments were £10,000.
If you were in the 20% tax bracket for your overall income, your rental income tax bill would be 20% of £12,000 - £2,400. But you receive 20% tax relief on your £10,000 mortgage interest payments - £2,000. So your total tax bill would be £400.
Based on the two examples above, it would appear the new buy-to-let mortgage tax rules have little impact on landlords. In both cases, the final rental income tax bill was £400.
However, landlords in a higher income tax bracket could end up paying a lot more tax than before. Let's use the previous example, but imagine you're in the 40% tax bracket now.
You made £12,000 per year of rental income. Your annual mortgage interest repayments were £10,000.
Your rental income tax bill would be 40% of £12,000 - £4,800. But you receive 20% tax relief on your £10,000 mortgage interest payments - £2,000. So your total rental income tax bill would be £2,800.
Cut back to before April 2017, and your total tax bill would have been only £800. A £2,000 increase.
So, if you're in a higher tax bracket, you could now be paying a lot more tax on rental income. But it could also affect you if you were previously in a lower tax bracket too. That's because you'll have to declare more income (now you can't deduct your mortgage interest payments from it), which could push you up into a higher tax bracket.
To get an idea of how much tax on rental income you have to pay, there are numerous buy-to-let tax calculators available online.
As a landlord, you might have to pay other taxes as well as tax on rental income, depending on your personal circumstances.
If you decide to sell a rental property that's increased in value, you'll usually have to pay capital gains tax (CGT). Although, certain rules apply if the property has been or is your home.
The amount you pay depends if you're a basic-rate taxpayer (18%) or a higher or additional-rate taxpayer (28%).
You may be required to pay Class 2 National Insurance tax if your letting activity is deemed as 'running a property business'. This might be the case if you let more than one property, being a landlord is your primary job, or you acquire properties with the intention of renting them out.
If you're classed as 'running a property business' and your profits are over £6,475 a year, you'll need to pay this tax. If it's under this amount, you can pay voluntary National Insurance payments as they can contribute towards things like your entitlement to a full state pension.
If you purchase more than one residential property, you have to pay 3% on top of the normal Stamp Duty Land Tax (SDLT). This SDLT calculator works out how much you need to pay, depending on the value of the property.