As a new landlord, you must register for self-assessment with Her Majesty’s Revenue Commission (HMRC) and file a tax return.
Before you start, it’s worth understanding the rental income tax and landlord taxes rules.
This guide will explore why you pay rental income tax and landlord taxes, pay rates, allowable expenses, and tax relief considerations.
Why You Pay Tax On Rental Income
Becoming a landlord on a buy-to-let property counts as running a business.
The rental income you receive from tenants is an ongoing source of income, and you’ll pay tax like any other monthly earning.
It’s sometimes called property income tax, landlord income tax, or buy to let income tax.
You’ll pay tax on your net rental income as a landlord, which is the profit you make from your rental property.
You can calculate it by adding rental income from your properties and subtracting any rental income tax relief, allowances, or allowable expenses.
Rental income can include money for:
- Rent.
- Heating.
- Repairs.
- Furniture usage.
- Cleaning of communal areas.
- Hot water.
Rental Income Tax Rates In The UK
The tax amount you pay will depend on your profit and how much income you receive from other sources like your job or pension.
The taxation thresholds and bands for rental income are the same as those for other forms of income like personal income.
However, you may push your usual tax threshold into a new, higher tax band when you add your rental income into any other income you receive.
You need to be careful and precise when calculating your income to determine how much tax is due.
You can expect the following income tax rates:
| Income Tax Band | Taxable Income UK 2021-2022 | Income Tax Rate UK 2021-2022 |
| Personal Allowance | Up to £12,570
|
0% |
| Basic Rate Tax | £12,571- £50,270
|
20% |
| Higher Rate Tax | £50,271 – £150,000 | 40% |
| Additional Rate | £150,001 and above | 45% |
- You’ll pay 0% in tax if your income is less than the basic rate threshold of £12,570.
- You’ll pay 20% in tax if your income is above £12,570 but below the higher rate threshold of £50,270.
- You’ll pay 40% tax if your income is above £50,270 but below the additional threshold of £150,000.
- You’ll pay 45% tax if your income is above the additional rate threshold of £150,000.
Calculating Your Income Tax Band
To figure out your income tax band:
- Determine your annual salary if you earn one, including bonuses or overtime, and don’t deduct the personal allowance of £12,570.
- Deduct any allowable expenses or property allowance from the total rental income to get the net rental income.
- Add your salary, net rental income, and other net income to get the marginal income tax band.
For example, let’s assume you earn a £40,000 salary, receive £20,000 in rental income, and incur deductible expenses of £5,000.
Your net rental income is £20,000 – £5,000 = £15,000.
When you add your net rental income to your salary, you get your income tax band; £15,000 + £40,000 = £55,000.
Therefore, you fall within the higher tax band.
When Should You report Rental Property Income?
If your total rental income is over £10,000 before expenses or £2,500 after expenses, you’ll need to file a tax return.
You should contact HMRC if your rental income is less than £2,500, as they may collect your payment through PAYE.
Landlord Tax Returns
HMRC uses self-assessment tax returns to collect income tax if you receive income from sources other than your salary, like income from rent.
The tax year runs from 6th April to 5th April the following year, and the deadlines for paying tax are the same as filing your tax return.
Ensure you keep any receipts from work done on your property to claim any expenses when completing a tax return.
Completing The Self-Assessment As A Landlord
Landlords can complete self-assessments in two ways:
- Fill Out The Tax Return Yourself
You can choose to fill out the tax return yourself and eliminate any accountant costs.
You can’t avoid landlord taxes even if you file the returns yourself so ensure you’re honest and thorough when completing your self-assessment.
- Employ An Accountant To Self-Assess On Your Behalf
If you don’t know how to file rental income on your taxes or you don’t feel confident filing your tax returns, you can benefit from engaging an accountant.
They can also help if your tax affairs are complex, where you may have more than one property, additional income sources, or rent out your property through a limited company.
It’s advisable to get an accountant with property taxation experience.
They’ll know how rental is taxed and the rules about taxation on rental income, the expenses you can claim, and the receipts you should keep.
Allowable Expenses And Tax Relief
Property Allowance
Property allowance is the first £1,000 you receive in rent from your tenants and its tax-free rental income.
If you’re a landlord who earns less than £1,000, you’ll receive total tax relief on your rental income and don’t have to worry about calculating expenses and reporting them to the HMRC.
Deductible Expenses
Claiming tax relief on expenses of renting out property can help you reduce your tax bill.
They’re the costs you incur when running the tenancy, and they’re expenses that you, not the tenant, pay for.
They include:
- Management and letting agent fees.
- Accountant fees.
- General maintenance and necessary repairs.
- Landlord insurance on buildings, contents, and public liability.
- Ground rent and service charges.
- Direct costs like stationery, business calls, and advertisements.
- Legal fees.
Landlords could previously claim the interest on their mortgage, and it was beneficial for higher rate taxpayers.
However, with new rules that came into effect in April 2020, you can no longer make this claim.
Instead, you receive a tax credit based on 20% of your mortgage interest payments.
Final Thoughts
Be wary of tips on avoiding rental income tax and landlord taxes as they’re usually very risky and unreliable.
Becoming a landlord can be very lucrative, but it can be intimidating because you pay taxes specifically.
It’s better to stay aware of the tax allowances that suit your circumstances and discuss tax efficiencies with a qualified accountant.
Call us today on 01925 906 210 or contact us. One of our advisors can talk through all of your options with you.
