Tax on Rental Income

You’ll need to pay tax on rental income whether you are an accidental or intentional landlord. Any individual who earns money needs to declare this to HMRC and pay tax on it, if necessary.  Here are the rules you need to follow if you collect and think you need to pay tax on rental income.

What Does Tax on Rental Income Mean

Tax on rental income means the amount of tax you need to pay on any money you collect as a landlord.

In summary the amount of tax you pay is based on:

  • The profit** you make from renting out a property/properties
  • Your personal circumstances and total earnings.

**profit means the amount you of money you make once you deduct all your allowable rental costs from the rental income you collect.

Register as a Landlord with HMRC

You’ll need to register as a Landlord with HMRC so that you can declare your rental income and pay tax.

You declare these amounts by filling out a Self Assessment Tax Return Form once a year.  A self assessment tax return form is  due by 31 January along with any tax due.  One tax return form covers a tax year, which runs from 6 April to 5 April.  So a tax return due by 31 January 2019 covers all income for the year 6 April 2017 to 5 April 2018.

You can register as a Landlord with HMRC online.  Check out my tutorial How to Register as a Landlord Online to find out how to do this and what will happen next.

How to Work out Your Rental Income

Rental income for tax purposes it the total amount of rent collected less allowable expenses.

Firstly add up rent collected during the tax year as well as anything else your tenant was charged for like:

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

Then deduct allowable expenses from the rent collected.  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).

Landlord bookkeeping and taxes

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.  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.

£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.