Contents
What Is Rental Income?
“Rent income is the earnings collected from tenancy for the use of space and other relevant services.”
Rent income is the amount earned from property ownership for allowing another individual/business entity to use their property. This income incorporates anything from advance rent payments, late payments, to current payments. Additionally, the income you receive for renewing a lease, cancelling residence, and relinquishing security deposit are considered rental earnings.
Your rental income does not only come from the rent money paid by tenants but also from these sources:
- Utility costs (e.g. gas, electricity, water)
- Pay for cleaning of communal space
- Parking fees
- Additional payments for the use of furniture
Anyone can earn rental property income in England. Usually, the most common types of landlords, whether in the form of incorporated businesses or individuals, include but do not limit to the following:
- Buy to let landlord
- Holiday lets landlord
What Kind of Taxes Do Landlords Pay?
- Corporation tax
- Income tax
What Other Tax Responsibilities Homeowners Have?
Other tax responsibilities a UK resident owning a home may deal with include:
- Council tax
- Capital gains tax
Council tax obligations are shouldered by the tenant unless the rental property is unoccupied, in which terms the landlord will have to pay. You will also pay capital gains tax (CGT) for a successful sale of a home, in which capital gain is added on top of an individual taxpayer or trade income. Buy to let property businesses pay capital gains tax upon selling and council tax upon buying a property and ownership.
How Much Tax Do I Pay on Rental Income?
The amount of tax you pay as a landlord relies on your circumstances. All taxpayers have their unique tax position and tax implications. This section explores the rental tax rates for the 2024/25 tax year.
- Income Tax
HMRC will see different rental properties as one property business and appropriately determine your tax amounts. Residential property rental income is the same as the standard income tax bracket.
“As a landlord, you have income tax liability on your rental net income, which is your total income minus any deductible expenses from your rental.”
For the 2024/25 tax year, the tax free property income allowance is at £12,570. If your property business makes less of this property allowance value in a tax year, you will not need to register with HMRC for self assessment. Registration is required for someone who earns excess from the thresholds for income tax purposes.
For the current year, you will pay tax as follows:
| TAX BANDS | TAXABLE INCOME | TAX RATES |
|---|---|---|
|
Basic Rate |
Between £12,571 and £50,270 |
20% |
|
Higher Rate |
Between £50,271 and £125,140 |
40% |
|
Additional Rate |
More than £125,140 |
45% |
- Corporation Tax
| TAXABLE INCOME | TAX RATES |
|---|---|
|
Less than £50,000 |
19% |
|
Between £50,000 and £250,000 |
25% |
|
More than £250,000 |
25% |
What Are Allowable Expenses?
A few rental expenditure can be taken into account for income tax relief deductions. These running costs generally include the following areas, to name some:
- Professional charges (e.g., management fees, legal or accountants’ wages, letting agent fees)
- Service charges
- Ground rents
- Utility bills (e.g., energy, water rates, etc.)
- Council tax
- Property repairs and maintenance (e.g., broken window, heating, etc.)
- Landlord, building, or contents insurance
Disclaimer: Information above is not an exhaustive basis for the relief criteria. Allowable rental cost may include other direct costs related to renting your property, such as stationery, phone calls, internet, and video advertising.
Rental costs landlords cannot claim relief for include the price for making major changes in their buildings, such as adding systems and spaces that did not exist before. Their main tax relief source is on rental repair and maintenance costs, which the latest HMRC one to many letters targeted.
Mortgage interest payments are no longer a part of the deduction since April 2020 when the mortgage interest relief restriction rules were implemented. This meant 75 per cent less tax advantages on finance costs (e.g., interest element of mortgage payment). Individuals with mortgages or rental finance costs will only benefit from the basic tax reduction of 25 per cent.
However, the replacement of domestic items relief policies is still in place, which supports landlords for their provision of certain domestic property purchase items, such as a few kinds of furnishings, kitchen equipment, and more. Capital allowances do not apply to everyone. Find out if you are eligible for the relief with the help of Legend Financial.
Allowable rental costs can be one of the most confusing things when claiming for property allowance relief. To ensure you state the right items in your tax return claim pages, contact our tax experts for assistance. Be sure to provide adequate evidence of your cost records (e.g., receipts, invoices, etc.), alongside your rental profits and other income sources (e.g., salary, dividends shares, asset sales, etc.).
When Should I Report Tax on Rental Income?
“The tax year will start on 6 April each year and will end on 5 April the next year. However, the deadline for tax returns completion is not until 31 January the year after.”
What Are Rental Property Losses?
How Legend Financial Can Help
Tax on rental income is very tricky to calculate, as many landlords get confused about which allowable expenses to include in self-assessment and many other aspects. Just recently, HMRC found out a lot of landlords made various errors in their 2021/22 tax relief claims. There is no penalty for the mistake, just a window of time for amendments. Legend Financial will help you on this matter and many other tax affairs. Reach us today!
References
Gareth. (n.d.). inews. Retrieved from
https://inews.co.uk/inews-lifestyle/money/what-are-the-tax-rules-for-renting-out-a-property-1066234
gov.uk. (n.d.). Retrieved from
https://www.gov.uk/renting-out-a-property/paying-tax
House Of Commons Library. (n.d.). Retrieved from https://commonslibrary.parliament.uk/research-briefings/cbp-8867/
Legend Financial. (n.d.). Retrieved from
https://legendfinancial.co.uk/blog/
Ruby. (n.d.). FT Advisors. Retrieved from https://www.ftadviser.com/mortgages/2021/07/05/fifth-of-btl-landlords-consider-exit/
