What don’t you know about the tax on rental income? Our guide gives landlords insight on how it’s applied, the rates you’ll pay and your allowances.
Buy-to-lets can be extremely lucrative so they attract a lot of entrepreneurial thinkers. They also intimidate masses of potential landlords because they’re taxed in a very specific way.
UK landlord tax comes in different forms: Stamp Duty Land Tax, Capital Gains Tax and Income Tax. These are the main 3. But you don’t pay them all at once. Stamp Duty you pay on the initial property purchase and you’re charged Capital Gains Tax when you sell an investment property. Income Tax is the only tax you’ll pay on an ongoing basis for an occupied buy-to-let property as a private landlord.
If you purchase a buy-to-let through a limited company in the UK, you pay Corporation Tax on the rental income. You can find more information on this below.
Why You Pay Tax on Rental Income
By becoming a landlord, you’re setting up an ongoing financial source – the rental income you receive from tenants. You pay tax on rental income like any other monthly earnings.
What Counts as Rental Income?
Rental income is classified as any money you receive from tenants for:
- Furniture usage
- Cleaning of communal areas
- Hot water
What Taxes Do You Need to Pay?
Income tax is the only tax private landlords pay on rental income. It has many names in the UK: landlord income tax, property income tax, buy-to-let income tax, etc. But these all refer to the same tax you pay every month.
You’re taxed on your net rental income, i.e. the profit you make; this is calculated by adding together all the rental income you receive from various properties and then subtracting any rental income tax allowances, relief or allowable expenses (total rental income minus property allowance or allowable expenses).
See Buy-to-Let Allowable Expenses below for more information on those landlord-only tax deductions.
What Are the Rental Income Tax Rates?
Your Income Tax band determines the rate at which you’ll pay tax on rental income that year. You may receive income from a variety of sources, each of which are taxed differently. You need to be meticulous when you calculate your income if you want to work out how much tax is due.
The Income Tax rates and thresholds for your rental income are the same as those for your personal income. However, adding your net rental income to any other income you receive may push you over your usual tax threshold and into a new, higher band.
The Income Tax rates are:
|Income Tax Band||Taxable Income 2018 – 2019||Income Tax Rate 2018 - 2019||Taxable Income 2019 – 2020||Income Tax Rate 2019 - 2020|
|Personal Allowance||Up to £11,850||0%||Up to £12,500||0%|
|Basic Rate||£11,851 - £46,350||20%||£12,501 - £50,000||20%|
|Higher Rate||£46,351 - £150,000||40%||£50,001 - £150,000||40%|
|Additional Rate||£150,001 and above||45%||£150,001 and above||45%|
If your income is:
- Less than the basic rate threshold of £12,500 – you’ll pay 0% in tax on rental income
- Above £12,500 and below the higher rate threshold of £50,000 - you’ll pay 20% in tax on rental income
- Above £50,000 and below the additional rate threshold of £150,000 – you’ll pay 40% in tax on rental income
- Above the additional rate threshold of £150,000 – you’ll pay 45% in tax on rental income
To figure out your Income Tax band, you:
- Work out your annual salary, if you earn one - including any overtime and bonuses and don’t deduct the personal allowance of £12,500
- Subtract your property allowance or your allowable expenses from your total rental income (total rental income minus property allowance or allowable expenses) to reveal your net rental income
- Deduct any applicable expenses or allowances from other incomes, e.g. from a business you own, to find your net income from that source
- Add together your salary, net rental income and remaining net incomes to reveal your Income Tax band
- You earn a salary of £40,000
- You also receive £20,000 in rental income
- You deduct £5,000 in expenses from your rental income to reveal your net rental income of £15,000
- These are your only sources of income
- You add together your salary and net rental income to reveal your Income Tax band: £40,000 + £15,000 = £55,000
- You fall within the higher rate tax band
- 0% on the first £12,500 = £0
- 20% on the amount above £12,500 and up to £50,000 = £7,500
- 40% on the remaining £5,000 above £50,000 = £2,000
- Total Income Tax, including tax on rental income = £9,500
How Do You Pay the Tax Due on Rental Income?
The process of paying tax on buy-to-let property income isn’t too onerous, but how to go about it depends on the amount you receive in rent.
- Earn less than £1000 a year in rental income then you don’t have to report it to HMRC
- Earn between £1000 and £2500 a year in rental income then you need to contact HMRC
- Earn between £2500 and £9999 after allowable expenses, or over £10,000 before allowable expenses, then you need to register with HMRC and complete a tax return that includes your rental income, as part of your yearly self-assessment
About Landlord Tax Returns
HMRC use self-assessment tax returns to collect Income Tax from people who receive income from sources other than their salary, e.g. income from rent. Therefore, landlords pay the tax due on rental income by completing a self-assessment tax return.
You fill out a self-assessment tax return every tax year, which runs from 6th April - 5th April. HMRC then use these figures to determine how much tax you need to pay. You must keep the receipts from any work you’ve had done on your property when you complete a tax return for a buy-to-let to claim any expenses.
There are 2 ways landlords can complete self-assessment:
- You fill out the tax return yourself
- You employ an accountant to self-assess on your behalf
Why do it yourself?
Many landlords choose to complete their own tax return as it eliminates the cost of an accountant. Self-assessment isn’t a way to avoid landlord taxes. You need to be honest and thorough if you choose to complete your own self-assessment.
Why use an accountant?
Not everyone knows how to file rental income on their taxes. By using an accountant, you’re minimising the worry that you’ll make a silly mistake. Your accountant will know how rental income is taxed, what you can claim and which receipts you need to keep. As a general rule, we suggest using an accountant with property taxation experience. They can guide you if there are some decisions to make regarding whether or not to own property in your personal name or in a limited company’s. You can find out in our guide: Limited Company Buy-to-Let Mortgages.
Buy-to-Let Allowable Expenses and Tax Relief
Landlords are taxed on their net rental income, i.e. the profit left over when you subtract your property allowance or allowable expenses from the total amount you receive in rent. HMRC have strict tax rules on the income from rental property, so there are limits as to what you can claim as a buy-to-let allowable expense.
From April 2017, the first £1000 you receive in rent from your tenants is tax-free rental income, otherwise known as your property allowance. This means that landlords who earn less than £1000 don’t have to worry about calculating expenses and reporting them to HMRC; they receive full tax relief on their rental income. There are some exceptions where deducting expenses is more useful to landlords earning under £1000, but this would depend on your individual circumstances.
If your rental income amounts to more than £1000 then you must complete a self-assessment tax return. You must also choose between receiving the property allowance or deducting expenses from your rental income.
Landlords who opt for the £1000 property allowance receive what’s known as partial relief on their Income Tax. Partial relief is useful if your deductible expenses are lower than £1000, as you’re able to claim a larger chunk of your rental income tax-free.
Deductible Expenses on Rental Income
You don’t pay any tax on rental income allowable expenses, but there are set rules which stipulate what you can and can’t deduct. You can deduct expenses that are exclusively for the purposes of renting out the property and that you, not the tenant, pay for.
What qualifies as a deductible expense for rental income?
Mortgage interest payments – see below for more information
General maintenance and necessary repairs but not improvements
Replacement of some domestic items
Letting agent fees and management fees
Insurance, e.g. landlords’ policies for buildings, contents and public liability
Water rates, Council Tax, gas and electricity
- Legal fees for lets of a year or less
- Legal fees for renewing a lease for less than 50 years
- Direct costs, e.g. business phone calls, stationery and advertisements
- Vehicle running costs for your rental business
What doesn’t qualify as a deductible expense for rental income?
- Your full mortgage payment – see below for more information
- Home improvements, e.g. replacing carpet with wooden flooring
- Calls not related to your property rental business
- Personal expenses
Changes to Mortgage Interest Tax Relief
Landlords who privately own a buy-to-let property are currently eligible for some tax relief on rental income if they pay mortgage interest on that property. However, the government are currently phasing out the amount of mortgage interest relief you can claim, simultaneously introducing a new relief. Sometimes this new relief is referred to as tax credits for landlords. We explain this in more detail below.
How the New Relief Will Work
From 2020, landlords will no longer be able to claim mortgage interest tax relief. Instead, you’ll receive a basic rate reduction from your Income Tax liability for your finance costs.
- You’re a higher rate tax payer and the maximum rate at which you pay Income Tax is 40%
- You pay Income Tax on your monthly income, including income from rent, after allowances and expenses
- Previously, you could deduct your total mortgage interest from your income when working out your net income, so that you wouldn’t pay any tax on it
- From April 2020, your total mortgage interest will be included in your net income, yet you will receive some tax relief on your mortgage interest
- You will receive a tax relief of 20% of your mortgage interest
To work out what you’d pay as a higher rate tax payer, you:
- Calculate Income Tax at 40% on your rental income, including any that goes towards mortgage interest
- Work out 20% of your mortgage interest to give you the tax relief amount you’ll receive
- Deduct the tax relief amount from the Income Tax you pay on rental income
The transition is one of the biggest tax changes landlords face. For more landlord tax advice and an explanation of the phasing out process, see our Buy-to-Let Tax Changes guide.
Ways to Reduce Buy-to-Let Taxes
Looking for tips on how to avoid landlord taxes isn’t the best idea, as the suggestions you’ll find are usually unreliable and more risk than they’re worth. Instead, make yourself aware of the allowances that suit your situation and discuss tax-efficiency with your accountant. You may learn how to pay less on tax on rental income than you first thought.
Limited Company Buy-to-Lets
Some people find it more tax-efficient to purchase a buy-to-let in the name of their limited company, as the taxation of rental income from limited company-owned properties differs from those owned by landlords. You don’t pay any Income Tax on rental income from buy-to-lets owned by limited companies. You pay Corporation Tax. HMRC doesn’t take your personal income into account when determining the rate at which you’ll be charged Corporation Tax as it’s a fixed rate. Corporation Tax currently stands at 19% (2019 - 2020) and is applied to your overall business earnings. It's also due to fall to 17% from April 2020.
This means it can work out cheaper, which is one of the main reasons many landlords are considering using a limited company, either now or in the future.
You also have more flexibility with the expenses you can claim on a limited company buy-to-let, since it’s considered part of your business rather than an investment.
Find out more in our Guide to Buy-to-Let Mortgages for Limited Companies.
Any advice on landlord tax relief and tax-efficiency should be sought from an accountant.
Landlord Taxes When Purchasing a Property
You pay Stamp Duty Land Tax (SDLT) whenever you purchase a property in the UK valued above £125,000. It’s not part of the tax payable on rental income; you pay Stamp Duty as a one-off cost at the time of purchase. You pay the same Stamp Duty on a second home as you would on a buy-to-let property because neither are your main residence.
Landlords and other individuals buying second properties in England and Northern Ireland pay extra Stamp Duty in the form of a 3% surcharge.
|Property Value||Standard SDLT Rate 2019 - 2020||SDLT Rate on Second Homes or Buy-to-Lets 2019 - 2020|
|Up to £125,000||0%||3%|
|£125,001 - £250,000||2%||5%|
|£250,001 - £925,000||5%||8%|
|£925,000 - £1,500,000||10%||13%|
|£1,500,001 and above||12%||15%|
Council Tax and Other Landlord Tax Considerations
Although you only pay Income Tax on the house rent received each month, there are other taxes you may have to pay at some point during your landlordship. It all depends on your circumstances.
As a landlord, you won’t pay the Council Tax on your buy-to-let properties unless they’re unoccupied. Council Tax is usually the responsibility of the tenant, but you may be liable if they leave. You can claim buy-to-let Council Tax as an expense when you complete your self-assessment tax return.
Capital Gains Tax
Landlords only pay Capital Gains Tax on the sale of a buy-to-let property. If you never sell your buy-to-let, then you don’t need to worry about paying Capital Gains Tax. You can find out more in our Capital Gains Tax guide.