Landlords need to pay tax on their rental income. How much tax you pay will depend on how much profit you make from renting out property, as well as other factors including your non-property income and your expenses as a landlord.
You will need to file a tax return to tell HMRC about your rental income. If you are a new landlord, you must register for self-assessment by 5 October following the year in which you received your property income.
Anyone new to renting out property in the UK should get to know the rules about tax on rental income – to help you, we’ve pulled together this simple guide …
Do I need to pay tax on rental income?
You will need to pay income tax on the profit you make from your rental property – this means the amount of money left from the rent you receive after you’ve deducted all allowable expenses. These are the costs incurred by running your rental business, such as letting agent fees and insurance premiums – see below.
How much tax will I pay on my rental income?
The amount of tax you pay will depend on how much profit you make as well as how much income you receive from other sources, such as your job or a pension.
The taxation bands and thresholds for rental income are the same as for other forms of income. Be aware that your rental income added to your personal income may push you into a higher tax band.
| Income Tax Band | Taxable Income 2020 – 2021 | Income Tax Rate 2020 – 2021 |
|---|---|---|
| Personal Allowance | Up to £12,500 | 0% |
| Basic Rate | £12,501 – £37,500 | 20% |
| Higher Rate | £37,501 – £150,000 | 40% |
| Additional Rate | £150,001 and above | 45% |
What counts as rental income for landlords?
Your rental income will mainly come from the rent you receive but it also includes other costs, which you pass on to your tenants. Examples include cleaning and maintenance charges for communal areas and any utility bills, which are included in the rent. You also need to include any portion of your tenant’s security deposit which you retain at the end of the tenancy. However, you can deduct these costs as allowable expenses.
What are allowable expenses?
You can reduce your tax bill by claiming for some of the expenses which come with renting out property. Allowable expenses are the day-to-day costs of managing your tenancy.
They include:
- Landlord insurance – buildings, contents and for public liability
- Letting agent and management fees
- Ground rent and service charges
- Cleaning and gardening fees, which you pay for
- Accountants’ fees
- The cost of advertising for tenants
- Stationery and phone calls used directly for your property business.
Tax on rental income – an example
If you charged a rent of £750 a month, and your tenant agreed to you retaining £500 of their deposit to cover repairs for damage they had caused, you would need to declare your annual income as £9,500. However, you would be able to deduct the £500 for repairs as an expense.
What if I have rental income from multiple properties?
Landlords with more than one property can add together the rents they receive from all their properties and deduct all of their expenses. This means that you are allowed to offset expenses from one property against rents from another.
The rules are different if you rent out property as well as having a share in a property company, as these two forms of rental income cannot be combined. There are also different rules if you rent out overseas property – get advice about this.
What is trading income?
Trading income is money you receive from additional services, not normally supplied by landlords, such as cleaning rooms, laundry or providing meals. This income will be treated separately from your rental income.
How do I declare my rental property income?
Anyone whose total rental income is more than £10,000 before expenses, or £2,500 after expenses, will need to file a tax return. If your rental income is less than £2,500 you should contact HMRC, as they may collect your income through PAYE.
Each tax year runs from 6 April until 5 April the following year. Rents received in the tax year up to 5 April 2020 would need to be included in your online tax return, which must be filed by 31 January 2021. In this example, if you are a new landlord, who hasn’t filed a tax return before, you will need to register for self-assessment by 5 October 2020.
What if I have losses on my rental income?
If your property business makes a loss one year, you can offset this against your future rental income. You can’t, however, offset it against other forms of income.
For example – if you made a £2,000 loss in 2018/19 but a profit of £5,000 in 2019/20, you could deduct the previous year’s loss from your profit, so you would only pay tax on £3,000.
If you only made £1,000 profit in 2019/20 you would be allowed to carry over the remaining £1,000 loss into 2020/21.
Do I need to pay tax when I sell my rental property?
If you sell your rental property you will have to pay capital gains tax (CGT) on rise in value of the property while you have owned it. CGT is charged at 18% for basic rate taxpayers and 28% for those taxed at the higher rate.
You may be able to claim a reduction in the tax you pay if you have lived in the home as your main residence – get advice from an accountant.
