A Landlord’s Guide to Rental Income Tax

 As a landlord, you must pay tax on the money you make from renting out your properties.  

In Central London areas such as Camden and Notting Hill, where average rent for properties exceeds £2,500 per month, rental income tax can be a significant amount. However, there are allowable expenses that can be deducted. 

This guide explains how tax on rental income is calculated, the rates you will pay and your allowances. 

Landlords are required to pay: 

• Income tax on profit from renting out residential property. 
• Class 2 national insurance if profits are £12,570 a year or more and what you do counts as running a business. 
• Capital gains tax if you sell an investment property. 
• Council tax if your property is empty. 

If you set up your property business as a limited company, your tax requirements differ from if you personally own the property. We explain this in more detail further on. 

What counts as rental income for landlords? 

Rental income is primarily the money you receive from your tenants in rent but can include charges for additional services you provide, including: 

• Cleaning 
• Hot water 
• Heating 
• Repairs 

You must also include any money retained from your tenant’s deposit at the end of the tenancy. 

You must declare your rental income in the tax year it is due, even if you’re not paid until the next tax year. This guide should help you calculate your tax on your rental income and expenses, but if in doubt, seek advice from a specialist accountant. 

Want to find out more? Read about how to reduce capital gains tax on property and find out what expenses you can claim as a landlord.

Allowable expenses for landlords 

You can deduct allowable expenses you incur from your rental income to calculate your taxable rental profit as long as they are wholly and exclusively for your property business. 

Examples of allowable expenses include: 

• General maintenance and repairs to the property, but not improvements 
• Bill such as water rates, council tax, gas and electricity 
• Landlord insurance 
• Letting agent’s fees 
• Accountant’s fees 
• Ground rents and service charges 
• Phone calls, stationery and advertising 
• Legal fees (related to tenant eviction, not for buying property) 
• Council tax (where applicable) 

You should declare any allowable expenses in the tax year the work was done, even if you don’t pay the bill until the next tax year. 

Tax relief on domestic items 

Landlords can sometimes claim tax relief on the replacement of certain domestic items. These include: 

• Fridges 
• Carpets 
• Sofas 
• Beds 
• Curtains 
• Crockery and cutlery 

To be able to claim for these items, they must have been purchased for the use of tenants and the replaced item must no longer be used in the property. 

Landlord property allowance 

The first £1,000 of your rental business income is tax-free; this is your personal property allowance. For joint owners, both parties can claim the allowance, i.e. £1,000 each against their share of the gross rental income. 

However, if you claim property income allowance, you are not allowed to deduct expenses, so you must calculate which option is more financially beneficial. 

Buy-to-let tax relief 

Landlords also receive a tax credit based on 20% of their buy-to-let mortgage interest payments. 

For example, if you made £15,000 in a tax year of rental income and are in the 20% tax bracket, your rental income tax bill would be 20% of the £15,000 = £3,000. 

If your mortgage interest payments were £10,000 in the tax year, you would work out the tax relief on this amount: 

20% of £10,000 = £2,000 

So, the amount owed to HMRC for rental income tax would be £3,000 – £2,000 = £1,000. 

How much tax will I pay on my rental income? 

The tax you pay on your property income will depend on the profit you have made, income received from other sources and any tax relief you are entitled to. 

To calculate your profit

• add together all your rental income 
• add together all your allowable expenses 
• deduct the expenses from the income 

If you have multiple properties, all your rental income and expenses are lumped together, giving you an overall profit for the year. 

To calculate your tax

Your rental income is added to your other income from your job or pension, and you are taxed according to the normal income tax brackets. 

Deduct your buy-to-let tax relief 

If you have a buy-to-let mortgage, you can claim tax relief for 20% of your mortgage interest payments. 

How tax is calculated on rental income: an example 

Here is an example of how your tax is calculated on your rental income: 

• Your annual rental income is £36,000, and your allowable expenses are £5,000, so you make £31,000 in profit from your buy-to-let property. 
• You earn £50,000 in other income, giving you a total taxable income of £81,000. 
• You have a standard personal allowance of £12,570. You will pay no tax on this part of your income. 
• You’ll pay 20% on the £37,699 between £12,571 and £50,270 (£7,540) and 40% on the remaining £30,730, which falls into the higher rate tax bracket (£12,292). 
• This gives you a total income tax bill of £19,832 
• You have paid £20,000 in mortgage interest, so you are entitled to a tax credit of £4,000. 

This leaves you with a tax bill of £15,832. 

When do I pay tax on my rental income? 

You pay tax on the rental profits you make in each tax year. The tax year runs from 6th April to 5th April the following year. You must file your self-assessment tax returns and pay your bill to HMRC by the 31st January following the end of the tax year. 

For example, for rental income earned between 6th April 2022 and 5th April 2023, you must file and pay your tax returns by 31st January 2024. 

Want to know more? Explore how to work out rental yield and the non-resident landlord scheme.

What if I have made a loss? 

You will make a loss if your expenses exceed your rental income. You can offset your loss against any profits you make from rental property in future years. 

For example, if you made a £1,500 loss in the tax year 2023/24 but then made a profit of £4,000 in 2024/25, you can deduct the previous year’s losses from the current year’s profit. So, for the tax year 2024/25, you would only pay tax on £2,500. 

What tax do I pay if I sell my rental property? 

As a buy-to-let landlord, you’ll be liable for capital gains tax (CGT) when you come to sell if the rental property in question has increased in value during your period of ownership. Indeed, most properties rise in value – capital appreciation is one of the main reasons people invest in property. 

Property can be far more lucrative than other forms of investing, including stocks and shares. If you are in the basic tax band, you will pay 18% CGT on any profits from your sale. If you are in the higher tax band, you will pay 24%. 

How can I avoid paying tax on rental income? 

These are some of the ways to minimise tax liability on rental income: 

• Deductible expenses – You can reduce your tax liability by maximising your deductible expenses, as covered earlier in this article. 
• Set up as limited company – For higher rate tax payers, setting up as a limited company could also be more tax efficient.  
• Rent a room – For landlords who live in the same property and rent a room out, the rent a room scheme allows up to £7,500 tax free income.  
• Offset losses against another property’s rental income – For landlords with more than one property, they can add together the rental income and expenses for the combined properties, which may also deliver tax efficiencies. 

Corporation tax vs. income and capital gains tax 

As a landlord, you can decide whether to set up your property business as a limited company or own property in your name. Choosing the ownership structure will determine which type of tax you pay and how much you pay, so you should do the necessary calculations to determine which option is right for you. 

If you set up as a limited company, you are required to pay corporation tax which is: 

• Profits up to £50,000 – 19% tax on all profits  
• Profits between £50,000 to £250,000 – 25% (eligible for marginal relief) 
• Profits above £250,000 – 25% tax on all profits (not eligible for marginal relief) 

Pros of setting up as a limited company 

• Corporation tax rates are more favourable than high-earner personal income tax rates of 40% and 45%. 
• Limited companies do not pay capital gains tax (CGT) when selling a property, while personal owners must pay CGT. 
• Profits can be retained in the business and used as a deposit on another property rather than paying tax on the profits. 
• Mortgage interest can be treated as a cost, as opposed to the 20% landlord tax relief. 

Cons of setting up as limited company 

• Costs can be higher for basic rate taxpayers. 
• Limited companies are required to file accounts and corporation tax returns, instead of completing a self assessment tax return. 
• There are usually fewer mortgage products available to limited companies. 

 
If you are unsure which property ownership option will be the most financially beneficial, you may want to speak to an accountant for professional advice. 

If you are a London landlord looking for guidance and assistance in letting property in Lancaster Gate, Hyde Park and surrounding areas, contact Plaza Estates, and we’ll be happy to assist you. 

Looking to Sell or Let?

Begin your journey with a free property valuation.
Get the facts and figures to make informed decisions.

Book a Valuation

Property Valuation

"*" indicates required fields

VALUATION TYPE*

SALES

RENTAL

RENTAL & SALES

Property Address*

Property Postcode*

Full Name*

Email*

Contact Number*

Additional Information

View our privacy policy regarding website enquiries.

This field is hidden when viewing the form

office

Submit

Contact Us

"*" indicates required fields

First Name*

Last Name*

Phone/Mobile Number*

Email Address*

Message

View our privacy policy regarding website enquiries.

This field is hidden when viewing the form

office

Submit