If you are a Landlord collecting rental income then you will need to pay tax on any profit you make from your Buy to Let property.  Your profit put simply is the amount you make after you deduct allowable costs from the rent you receive. The amount of tax you pay will depend firstly on how much you make and secondly, your personal earning circumstances.

Let HMRC Know

If you haven’t already, then you must let HMRC know that you are earning money from renting out a property.  You should do this by the 5 October following the tax year you started receiving rent.  A tax year runs from 6 April to 5 April.  For example, say you begun receiving rental income on 31 January 2017, then you should let HMRC know about this by 5 October 2017 so you submit a tax return and pay tax on these earnings by 31 January 2018.

You can let HMRC know online here, just choose the right option for you.

Self Assessment Tax Return

You will now be required to submit a tax return by the 31 January each year, notifying HMRC of the ALL of money you earned in the tax year, including your rental profits as a landlord.

How to Work out Your Rental Profits

The first step is to add up the amount of rent you have collected from your tenants.  This will typically be the amount the tenant agreed to pay in accordance with their tenancy agreement, but it may include anything else you needed to charge them for such as:

  • the use of furniture
  • charges for additional services you give such as:
    • cleaning of communal areas
    • hot water
    • heating
    • repairs to the property

Deduct Your Allowable Expenses

To work out your taxable rental profit you can deduct the expenses you incurred maintaining your property while it is rented out.  These expenses must be Wholly & Exclusively for the purposes for renting out the property here are some common examples

  • general maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
  • water rates, council tax, gas and electricity
  • insurance, such as landlords’ policies for buildings, contents and public liability
  • costs of services, including the wages of gardeners and cleaners
  • letting agent fees and management fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountant’s fees
  • rents (if you’re sub-letting), ground rents and service charges
  • direct costs such as phone calls, stationery and advertising for new tenants
  • vehicle running costs (only the proportion used for your rental business)
  • a portion of your mortgage interest (although the amount of tax relief you can claim is reducing until it is removed in 2020 though)

Find out more about Tax Allowable Expenses for Buy to Let Landlords here.

Calculate Tax To Pay on Your Rental

The tax you pay is based on your rental profits (rental income less allowable expenses).  The amount of tax you pay depends on your earnings in total during the tax year (6 April to the following 5 April).

We are all entitled to a Personal Allowance, the amount you can earn without paying tax but above this you will start to pay tax.  For 2017/18 these are:

Band Taxable income Tax rate
Personal Allowance Up to £11,500 0%
Basic rate £11,501 to £33,500 20%
Higher rate £33,501 to £150,000 40%
Additional rate over £150,000 45%

These bands change each tax year, so you should keep an eye of how they change and the impact on the amount of tax you have to pay.  Take a look at 2016/17:

Band Taxable income Tax rate
Personal Allowance Up to £11,000 0%
Basic rate £11,001 to £32,000 20%
Higher rate £32,001 to £150,000 40%
Additional rate over £150,000 45%

An example:

During the tax year 2017/2018 Molly had a full time job earning £45,000 per annum and also rented out a property for which the rental profits were £11,000.  Molly will need to submit a Personal Tax Return by 31 January 2019 as well as paying the additional income tax on the profit from her rental property by this date.  Molly’s tax for the year is worked out like this:

Total Earnings (£45,000 + £11,000) £56,000

Less: Personal Allowance -£11,500

Taxable income £44,500

Molly needs to pay tax for the year amounting to :

Basic Rate £21,999 at 20% £4,399.80

Higher Rate £22,501 at 40% £9,000.40

Total Tax £13,400.20

Molly shouldn’t panic when she sees this because as she was in full time employment her employer deducted tax each month from her pay (she will have received a P60 with the amount).  Therefore HMRC will already have received £9,000.20 of this so she needs to pay the remaining £4,400 by 31 January 2017.

In this example Molly only had to consider her employment income in addition to her rental income, but when working out how much tax you have to pay for your self assessment tax return you need to make sure you consider all forms of income which includes things like:

  • Self employment income
  • Interest
  • Dividends
  • Pensions
  • Capital Gains

Always speak to a professional if you are unsure whether you need to include something on your tax return.

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