Owning a rental property is considered a safe investment. The landlords also receive a regular rental income along with property price appreciation.
A quick note: we use the word landlord in a gender-neutral way here.
When you rent a property, then in most cases, you will have to declare this to HMRC and pay any tax due on the rental income you earn.
But knowing which taxes to pay can be a challenging task. In this blog, let’s check out everything about tax on rental income that landlords have to pay.
Table of contents
- What taxes do you need to pay?
- How much is rental income tax-free?
- What are the rental income tax rates?
- What are allowable landlord expenses?
- Do landlords pay National Insurance on rental income?
- What happens if you don’t declare rental income?
- Why use an accountant?
- Final thoughts
Need Tax Services
Work with a London-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
Tax on rental income: what landlords need to know
1. What taxes do you need to pay?
Private landlords pay income tax on their rental revenue. It has several names in the UK: landlord income tax, buy-to-let income tax, property income tax, etc. But they’re all referring to the same tax.
You pay taxes on your net rental income. The rental income is the profit after adding up all the rent and deducting any tax breaks, exemptions, or permitted expenses (total rental income minus property allowance or allowable expenses).
2. How much is rental income tax-free?
Since 6th April 2017, if you rent 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 need to pay any tax on it.
If your annual income from property rental is between £1,000 and £2,500, you must contact HMRC. You must also complete a Self Assessment tax return if it is between £2,500 and £9,999 after allowable expenses or £10,000 or more before allowable expenses.
3. What are the rental income tax rates?
The rate at which you will pay tax on your rental income for that year depends on your income tax band.
You may earn income from many sources; each is taxed separately. To determine how much tax is owed, you must be particularly careful when calculating your income.
The Income Tax rates and limits for your rental earnings are the same as those for your personal earnings. However, combining your net rental income with any other earnings you receive may push you over your usual income threshold and into a new, higher band.
The Income Tax rates are:
If your income is:
- Less than the basic rate limit of £12,570 – you will pay 0% tax on rental income
- Above £12,570 and below the higher rate limit of £50,270 – you will pay 20% tax on rental income
- Above £50,270 and below the additional rate limit of £150,000 – you will pay a 40% tax on rental income
- Above the additional rate limit of £150,000 (£125,000 from tax year 2023-24) – you will pay a 45% tax on rental income.
4. What are allowable landlord expenses?
Below are some instances of landlord expenditures you can deduct:
- General maintenance of the property
- Water rates, gas, council tax, and electricity
- Landlord Insurance
- Costs of services like the salaries of cleaners and gardeners
- Letting management and agent fees
- Accountant’s fees
- Direct costs like phone calls, advertising, and stationery for new tenants
The costs are allowable if incurred for renting out the property. For instance, you shouldn’t purchase floor tiles for your personal residence and then deduct from the cost of your rental property. However, if you bought a large order of floor tiles and used some in the residential property and a portion in the rental property, you could claim part expenses.
It’s worth having a copy of all your expense invoices, as HMRC may ask for proof. Consider photographing or scanning them before storing them on a hard drive, computer, or cloud.
Expenses that can’t be claimed
The following are a few instances of landlord expenses you cannot deduct:
- Home improvement expense
- Personal phone calls
- Personal costs
- Clothing
- Interest expenses on mortgages- you can claim a tax credit at a standard rate of tax- 20%
5. Do landlords pay National Insurance on rental income?
According to Gov. uk, if your profits are £6,475 or more annually and renting out houses is your primary source of income, you must pay Class 2 National Insurance. Generally, you only pay NI if you’re running the operation as a business.
Gov. uk advises considering all of the following factors to determine whether renting out your property qualifies as a business:
- Being a property owner is your primary job
- You have multiple rental properties.
- You’re purchasing new properties to rent out.
If you are not renting out a property as a business, you don’t pay NI – even if you handle your property yourself.
6. What happens if you don’t declare rental income?
You might be one of several landlords unaware that you have to declare rental earnings to HMRC. Not reporting your rental earnings could prove costly.
You can face a sizable back-dated tax bill and incur a fine. It’s always safer to double-check with HMRC if you are unsure whether you need to report your rental income.
You can use the HMRC DDS service to declare any unreported income.
Need Tax Services
Work with a London-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
7. Why use an accountant?
It’s challenging for everyone to know how to file rental income on their taxes. By using an accountant, you’re minimising the worry that you’ll make a minor error.
An accountant can help you know your rental income is taxed, what you can claim, and which invoices you need to have. Generally, we recommend hiring an accountant with property taxation expertise.
Final thoughts
For property owners, rental tax can be a maze of information –even before all the regular updates investors have to keep up with.
But knowing your tax liabilities as a property owner is very important. Landlords in the UK must pay taxes on the rental income, just like any other source of earnings.
Without careful planning, you can risk losing a large amount of your rental income to taxes. You can lower your tax burden by using the deductions offered by HMRC tax rules.
