Tax on Rental Income

Whether you are an accidental or intentional landlord, you will need to address the issue of tax on rental income. With property prices spiralling over recent years tax on rental income has become a hot topic with HMRC and the Government who are attempt to slow down house price increases with changes to how tax is charged on rental income.

If you are a landlord collecting rental income then the amount of tax you pay is actually based on your rental profits. Your rental profits, put simply, is the amount of money you make after you deduct allowable costs from the rent you receive, we’ll explore this below. The amount of tax you pay on your rental profits depends on how much you make and your personal circumstances.

How to Work out Your Rental Income

When you work out your tax on rental income, 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 from Your Rental Income

Before you work out your tax on your rental income, HMRC sets out rules which you must follow to determine which expenses your can deduct from your rental income.  Generally you can deduct expenses that are wholly and exclusively incurred for the purposes of renting out and maintaining your property. Here are some common examples of allowable expenses for Landlords:

  • 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;
  • services charges and ground rent;
  • Landlord mileage and travel 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)

Calculating Tax On Rental Income

Once you have worked out your rental profits (your rental income less allowable expenses), then you can work out the tax you need to pay. The amount of tax you pay depends on all your earnings in total during the tax year (6 April to 5 April).  The tax rates change each year but for 2018/19 the tax rates are:

Band Taxable income Tax rate
Personal Allowance Up to £11,850 0%
Basic rate £11,851 to £34,500 20%
Higher rate £34,501 to £150,000 40%
Additional rate over £150,000 45%

Note: National Insurance, if for example you are employed in a job is an additional amount you’ll need to pay and is worked out differently.

An Example of Working Out Tax on Rental Income

During the tax year 2018/2019 Molly had a full time job earning £45,000 per annum and also rented out a property for which the rental profits, after deducting allowable expenses, were £11,000.  Molly will need to submit a Self Assessment Tax Return by 31 January 2020, as well as paying the additional income tax on the profit from her rental property.

Molly’s tax on rental income is worked out like this:

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

Less: Personal Allowance £11,850

Taxable income £44,150

Molly needs to pay tax for the year amounting to:

Basic Rate £22,649 at 20% £4,529.80

Higher Rate £21,501 at 40% £8,600.40

Total Tax Due £13,130.20

Since Molly was employed in a full time job she will have paid tax already on this part of her earnings, therefore she can deduct this from the figure of £13,130.20 and pay the balance over.  She’ll find details of how much tax she has paid on her P60 and her P45 if she changed jobs during the tax year.

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

£1,000 Property Allowance

HMRC introduced a little tax break a couple of years ago called the Annual Tax Allowance for Trading and Property Income.  If your rental income is less than £1,000 then you don’t need to pay any tax on it, better still if you don’t currently submit a tax return then you don’t even need to let HMRC know about your income.

The £1,000 property allowance is based on rental income not rental profits and you can find out more about the Property Allowance as well as how you claim for it here.

Anita is a Chartered Accountant, turned blogger and creator of the ever popular free Go Self Employed Email Mini Course, which has been completed by hundreds of attendees all over the UK. Using her 10 years experience in accounting, tax and operations for Small Businesses, Anita is on a mission to make finance simple for the self employed, so they can stop stressing about tax & finances and focus on building profitable businesses which will give them the lifestyle they dream of.