UK Rental Income Tax: A Guide for Landlords

Taxes aren’t the most entertaining topic, especially for landlords. Mainly because they can be challenging to understand when you aren’t a trained accountant. How can you figure out your property rental income tax or duty land tax when you don’t quite understand what either is? Luckily, once you know the basics of an income tax rate and all associated topics for your property rental business, you don’t have to stress too much anymore.

If you’re a landlord or own a property rental business and want to know more about UK tax liability, property allowance, and taxable profit, then our qualified property accountants have all the answers for you. Continue reading below before completing your own self-assessment, and it will go through like a breeze.

What is rental income tax?

Rental income tax is the tax obligation associated with income earned from renting a UK property. This taxation is subject to the rules and regulations set by HM Revenue and Customs (HMRC).

When you receive income from your rental properties, it is generally considered taxable and must be reported to HMRC. This is added to your total income for the tax year and is subject to income tax.

The tax you pay depends on your overall income and tax bracket. UK income tax rates are divided into different bands or thresholds, each with its own tax rate.

• The basic rate: 20%
• The higher rate: 40%
• The additional rate: 45%

As a landlord, you can deduct certain expenses to determine the taxable amount. These deductible expenses may include mortgage interest payments, letting agent fees, repairs and maintenance costs, insurance premiums, and other expenses related to managing and maintaining the property.

It’s worth noting that the UK government has changed the tax treatment of income from rental properties in recent years. For example, the rules regarding mortgage interest tax relief have been altered, gradually reducing the amount of mortgage interest that can be deducted.

How rental income tax is calculated

The calculation of rental income tax involves several steps. Here’s a general overview of how it is typically calculated in the UK:

1. Calculate Gross Rental Income: Add up all the income you receive from your tenants, including rent, service charges, and any other payments related to the rental property. This gives you your gross rental property income.
2. Deduct Allowable Expenses: Identify the allowable expenses you can deduct from your gross rental income. Common deductible expenses include mortgage interest payments, property management fees, repairs and maintenance costs, insurance premiums, council tax, advertising expenses, and other costs associated with running and maintaining the rental property. Note that since April 2017, the tax relief for mortgage interest has been gradually reduced and replaced with a basic rate tax reduction.
3. Calculate Net Rental Income: Subtract the allowable expenses from the gross rental property income. This will give you your net income, which you’ll use for tax calculation purposes.
4. Apply Tax Rates: Determine your tax bracket based on your overall income, including your net income.
5. Calculate Tax Liability: Multiply your net income by the applicable tax rate based on your tax bracket. This will give you the tax you owe on your rental property income.

Rental income and personal allowance

The personal allowance is the amount of income you can earn each tax year before you start paying income tax. The connection between rental income and personal allowance is important, as exceeding the threshold can impact your tax liability.

The personal allowance for individuals in the UK was £12,570. This means that if your total income is below this threshold, you won’t have to pay income tax on your rental property income.

If your rental income, along with any other income you earn, exceeds the personal allowance, the following impacts may occur:

• Taxable Income: When your income exceeds the personal allowance, your rental income will be added to your other sources of income to determine your overall taxable income. This will be subject to income tax based on the applicable tax rates.
• Basic Rate Taxpayers: If you are a basic rate taxpayer, your total income falls within the basic rate tax band, and the rental property income will be taxed at the basic rate, currently set at 20%. However, the personal allowance is still deducted from your total income before calculating the tax liability.
• Higher Rate and Additional Rate Taxpayers: If your total income pushes you into the higher rate or additional rate tax bands, the rental income will be subject to higher tax rates of 40% or 45%, respectively. Again, the personal allowance is factored into the calculations to determine the tax liability.
• Losses and Allowable Expenses: If your rental property income exceeds the personal allowance, you can still deduct allowable expenses and losses related to your rental property before calculating your taxable income. This includes mortgage interest (with restrictions since April 2017), repairs and maintenance costs, insurance premiums, and other eligible expenses.
• Reporting Requirements: If your income from your rental properties exceeds a certain threshold, you may need to register for self-assessment with HM Revenue and Customs (HMRC) and file an annual tax return. This ensures accurate reports so you can claim any applicable deductions.

What expenses can be deducted from rental income?

When calculating rental income tax in the United Kingdom, landlords can claim various deductible expenses to help reduce their taxable income. Here are some common deductible expenses:

1. Mortgage Interest: Landlords can deduct the mortgage interest payments on loans used to purchase or improve the rental property. However, it’s important to note that the tax relief for mortgage interest has been gradually reduced and replaced with a basic rate tax reduction since April 2017.
2. Repairs and Maintenance: The costs incurred for repairs, maintenance, and general upkeep of the rental property are deductible. This includes expenses for fixing appliances, repairing plumbing or electrical systems, repainting, and replacing broken fixtures.
3. Council Tax and Utilities: If you, as the landlord, are responsible for paying the council tax or utility bills associated with the rental property, these expenses can be deducted.
4. Insurance Premiums: The insurance premiums paid for landlord insurance, which typically covers buildings, contents, and liability, are deductible.
5. Letting Agent Fees: Fees paid to a letting agent for finding tenants, collecting rent, managing the property, or any other services can be claimed as deductible expenses.
6. Legal and Professional Fees: Certain legal and professional fees related to the rental property, such as those paid for drafting tenancy agreements or obtaining tax advice, can be deducted.

Claiming relief on finance costs

The provision for relief on finance costs, or mortgage interest relief, refers to a tax measure in the United Kingdom that allows landlords to claim relief on the interest they pay on loans used to finance their rental properties. This provision has changed recently, so it’s essential to understand how landlords can take advantage of it.

Before April 2017, landlords could deduct the total amount of their mortgage interest payments from their rental income when calculating their taxable income. However, since April 2017, the government has been restricting this relief.

Here’s how landlords can currently take advantage of the provision for relief on finance costs:

• Transitioning to Basic Rate Tax Reduction: Landlords can now only claim a basic rate tax reduction on their finance costs. This means that landlords can deduct 20% of the interest costs from their rental income instead of deducting the entire mortgage interest as a tax reduction.
• Declaring Finance Costs: Landlords must report their rental income on their self-assessment tax return, including the finance costs. The finance costs should be declared separately from other allowable expenses.
• Claiming the Basic Rate Tax Reduction: The basic rate tax reduction can be claimed on the tax return by including the relevant information and calculations. The tax reduction will then be applied to the landlord’s tax liability.
• Impact on Tax Liability: The restriction on mortgage interest relief may result in higher taxable rental profits for landlords. Landlords must consider the impact on their overall tax liability and adjust their financial planning accordingly.

Understanding tax bands and rates

In the United Kingdom, income tax rates are divided into different tax bands, each with its own applicable tax rate. These tax bands determine how much tax you need to pay on your overall income. Here’s a simplified explanation of the different tax bands and their rates:

Basic Rate Tax Band:

• Tax Rate: 20%
• Income Range: The basic rate tax band applies to taxable income above the personal allowance (£12,570) up to £50,270.
• Application: If your total taxable income falls within the basic rate tax band, the rental income will be subject to a 20% tax rate.

Higher Rate Tax Band:

• Tax Rate: 40%
• Income Range: The higher rate tax band applies to taxable income above £50,270 up to £150,000.
• Application: If your total taxable income falls within the higher rate tax band, the rental income will be subject to a 40% tax rate.

Additional Rate Tax Band:

• Tax Rate: 45%
• Income Range: The additional rate tax band applies to taxable income above £150,000.
• Application: If your total taxable income falls within the additional rate tax band, the rental income will be subject to a 45% tax rate.

It’s important to note that the income you receive from rental properties is combined with other sources of income when determining your overall taxable income and tax bracket. For example, if it pushes you into a higher tax band, only the portion of income within that band will be taxed at a higher rate.

Rental income tax for non-resident landlords

When landlords live overseas but rent out property in the UK, they have tax obligations. Non-UK resident landlords are generally subject to UK income tax on their rental income. The Non-Resident Landlord (NRL) Scheme requires letting agents or tenants to deduct basic rate income tax (currently 20%) and remit it to HM Revenue and Customs (HMRC).

Exemptions from the NRL Scheme can be obtained under certain conditions. Double taxation issues should be considered, and landlords may need to file a UK self-assessment tax return. It’s crucial to seek professional advice to understand specific obligations, deductions, and compliance with tax laws in both jurisdictions.

Frequently asked questions

Is rental income taxable?

Yes, it is generally taxable and should be reported on your tax return. It is considered part of your overall income and subject to income tax.

How is rental income taxed?

It is typically taxed at applicable tax rates based on your total income. The income is added to your other sources of income, and the tax is calculated accordingly.

What expenses can be deducted from rental income?

Common deductible expenses include mortgage interest, property taxes, repairs and maintenance costs, insurance premiums, property management fees, advertising expenses, and certain other expenses related to the rental property.

Do I need to pay tax on the full rental income amount?

No, you can deduct allowable expenses from the rental income to arrive at your net amount. The tax is then calculated on the net amount.

Do I need to keep records of rental income and expenses?

Maintaining accurate records and documentation of income received and expenses incurred is important. This will help support your tax calculations and provide evidence in case of an audit.

Can I claim tax relief for mortgage interest?

The tax relief for mortgage interest has changed. As of April 2020, it has been replaced with a basic rate tax reduction, allowing landlords to claim a tax reduction at the basic rate on their finance costs.

Should I consult a tax professional?

It is highly recommended to seek advice from a qualified tax professional or accountant who can provide personalised guidance based on your specific circumstances and ensure compliance with tax laws and regulations.