When renting out a property, there are three main types of tax you need to be aware of: Stamp duty land tax, capital gains tax and income tax. In this article, we’re going to focus on income tax; specifically, how much tax you pay on rental income.
Private landlords who rent out properties will usually be required to pay income tax on the rental income, however there are some exceptions to this.
Most people in the UK get a personal allowance, which means you don’t have to pay tax on income that’s below a certain amount. As well as this, there are some other tax exemptions and allowances which could reduce your tax bill, but we’ll go into all of these in more detail later on.
If you rent out property, you’ll usually have to pay tax on the profit you make – but how much you pay depends on which tax band your total income falls into. If you earn other types of income, the money you make from renting out your property could tip you into a higher tax bracket, meaning you’ll end up paying more income tax.
Your profit is worked out by adding together all of the income you make from renting out properties and subtracting any expenses or allowances.
Read on to find out more about how income tax is calculated, what you can expect to pay and the different types of tax relief that are available.
As a landlord, you’re receiving a regular source of income, which means you must pay tax on it; the same as you would with other types of income.
Income tax is collected by HMRC to help fund public services such as education, housing, the NHS, the welfare system and public roads.
You’re taxed on your net rental income, which is calculated by adding together everything you make from renting out your properties and subtracting any expenses and tax allowances (which we go into in more detail below).
This is then added to any other sources of taxable income you have – for example, employment, pensions, trusts and certain types of grant – to determine your tax bracket and the rate you pay. As mentioned above, adding these figures together could push you into a higher bracket, meaning you’ll have to pay more tax.
For the tax year 2021/22, the income tax bands are as follows:
England, Wales and Northern Ireland
| Band | Taxable income | Tax rate |
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £150,000 | 40% |
| Additional rate | More than £150,000 | 45% |
Scotland
| Band | Taxable income | Tax rate |
| Personal allowance | Up to £12,570 | 0% |
| Starter rate | £12,571 to £14,667 | 19% |
| Basic rate | £14,668 to £25,296 | 20% |
| Intermediate rate | £25,297 to £43,662 | 21% |
| Higher rate | £43,663 to £150,000 | 41% |
| Additional rate | More than £150,000 | 46% |
It’s worth noting, though, that not everyone’s personal allowance will be the same, as it can differ depending on whether you owe or are owed tax from a previous year or you earn more than £100,000 a year. If your income is more than £100,000, your personal allowance will be reduced by £1 for every £2 of income, meaning your personal allowance could end up being nothing.
You’ll also have to pay Class 2 national insurance contributions if you’re running a property rental business and you’re making a profit of more than £6,515 (for the tax year 2021/22). You’ll qualify as running a property business if all of the following statements apply to you:
- Being a landlord is your main job
- You buy new properties to rent out
- You have more than one property that you rent out
How much of rental earnings are tax-free?
There are a number of ways in which you can reduce the amount of income tax you owe:
Property allowance
You can receive up to £1,000 of tax-free rental income from a property you own personally. This is known as your property allowance and you don’t have to declare it to HMRC.
If, however, you earn between £1,000 and £2,500 after allowable expenses (see below), you need to contact HMRC directly, as they may be able to collect your tax via PAYE.
Any income more than £2,500 must be declared on a self-assessment tax return and you also have to choose between deducting expenses from your rental income and receiving the property allowance.
Allowable expenses
When calculating your profit, make sure you deduct any money you spend on maintaining and managing your property. Some examples of allowable expenses include:
- Buildings, contents and landlord insurance
- Estate agent fees
- Accountancy fees
- Utility bills and council tax
- Ground rent and service charges
- Property maintenance and repairs (but not improvements)
Other tax relief
If you own a holiday home that you rent out, you may also be able to subtract expenses for equipment like air conditioning and CCTV, as well as replacing items like beds, carpets, sofas, curtains and fridges in furnished holiday lets.
With regards to commercial property, deductible expenses can include money spent on escalators, lifts and electrical systems.
Remember to keep hold of any receipts in case HMRC wants proof of your expenses.
How much of my mortgage payment is tax-deductible?
You may have heard of mortgage tax relief, which allowed you to deduct mortgage interest from your rental earnings. However, this has now been replaced with a 20 per cent tax credit.
If you live outside of the UK for more than six months per year, you’re classed as a ‘non-resident landlord’ by HMRC.
You still have to pay tax – depending on how much you earn from rental income – and you can do this in one of two ways. You can either get your rent in full and pay your tax bill through self-assessment, or you can receive your rent from your letting agent or tenant with the tax already deducted.
Before deciding whether to buy an investment rental property, you should take into consideration the capital gains tax you may have to pay when you come to sell.
It might not apply to you if the property is or has been your home, but otherwise, it’s treated the same as the sale of any other asset. Basic-rate taxpayers will pay 18 per cent and higher or additional rate taxpayers will pay 28 per cent on the money made over the personal allowance for the tax year.
There are penalties and possible criminal prosecution for failing to disclose your rental income.
If, however, you declare unpaid tax for previous years, the penalty you have to pay will be lower than if HMRC finds out about the income itself.
The amount of tax you pay on rental income depends on how much profit you make and whether you have any other sources of income.
There are certain allowances, like the personal allowance and property allowance that you don’t have to pay tax on and you can claim tax relief on certain things like insurance, letting agent fees and utility bills.
It’s important to declare your rental income because not doing so can result in penalties and criminal prosecution.