This guide has been produced for information purposes only. As a buy-to-let mortgage broker, we're not able to offer tax advice.
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 get a limited company buy-to-let in the UK, you'll pay Corporation Tax on the rental income instead. You can find more information on this below.
The Topics Covered in this Article Are Listed Below:
- Why Do You Pay Tax on Rental Income?
- What Taxes Do You Need to Pay?
- Do I Have to Pay UK Tax on Income from a Property Overseas?
- Types of Property Ownership
- Record Keeping Tips for Rental Income
- What Are the Rental Income Tax Rates?
- Buy-to-Let Allowable Expenses and Tax Relief
- Ways to Reduce Buy-to-Let Taxes
- Landlord Taxes When Purchasing a Property
- Council Tax and Other Landlord Tax Considerations
Why Do You Pay Tax on Rental Income?
By becoming a landlord, you’re setting up an ongoing financial source of income – 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 classed 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.
Do I Have to Pay UK Tax on Income from a Property Overseas?
Tax for overseas property rentals is largely handled in the same way as UK property rentals. If you live in the UK and are domiciled in the UK, it’s likely you’ll have to pay Income Tax on your income from overseas properties. If you’re not a UK resident, you won’t have to pay UK Income Tax on this rental income. This includes if you’re in the UK but your permanent home or domicile is overseas.
Depending on your circumstances, you might have to pay tax to the country from which you gain the income as well as pay UK Income Tax. You can look into Foreign Tax Credit Relief to reduce how much tax you have to pay. If you have rental properties in the UK as well as overseas, it is highly advisable to get professional advice from a tax adviser or accountant.
Types of Property Ownership
The main types of property ownership that can affect the Income Tax you pay include the following:
- Sole ownership - if you own the rental property by yourself, you’ll pay Income Tax on the whole income from that property
- Jointly-owned property - if you own a rental property with other people, you’ll pay Income Tax on the property’s income relative to your share in the property. If you jointly own some properties and solely own other properties, the income is counted as one business for tax purposes
- Property jointly-owned with a spouse or civil partner - if you own a property with your civil partner or spouse, you will usually be taxed as if you own equal shares of the property. If you own unequal shares, you will need to demonstrate and provide proof of this to HMRC in order to pay the correct tax
- Owning property through a company - if you own property through a limited company, you’ll be liable for Corporation Tax on the profits not Income Tax
Record Keeping Tips for Rental Income
It’s important to keep accurate records of your income and allowable rental expenses from rental properties. These should be split into your income from different categories, such as overseas properties, UK properties, fully-furnished lettings and unfurnished/part-furnished lettings.
You should make sure you have all relevant evidence of the property - such as rent books, receipts, invoices, bank statements and mileage logs. If you don’t have this evidence, you could be charged a fine when it comes time to pay tax on rental income.
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 2023 – 2024||Income Tax Rate 2023 - 2024||Taxable Income 2024 - 2025||Income Tax Rate 2024 - 2025|
|Personal Allowance||Up to £12,570||0%||Up to £12,570||0%|
|Basic Rate||£12,571 - £50,270||20%||£12,571 - £50,270||20%|
|Higher Rate||£50,271 - £125,139||40%||£50,271 - £125,139||40%|
|Additional Rate||£125,140 and above||45%||£125,140 and above||45%|
If your income is:
- Less than the basic rate threshold of £12,570 – you’ll pay 0% in tax on rental income
- Above £12,570 and below the higher rate threshold of £50,270 - you’ll pay 20% in tax on rental income
- Above £50,270 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 £12,570
- 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
- Add together your salary, net rental income and any other remaining net incomes to reveal your marginal Income Tax band
- Deduct any applicable expenses or allowances from any other incomes - e.g. from a business you own, to find your net income from that source
How Do You Pay the Tax Due on Rental Income?
The process of paying tax on buy-to-let property income isn’t too difficult, but how to go about it depends on the amount you receive in rent.
- Earn less than £1,000 a year in rental income then you don’t have to report it to HMRC
- Earn between £1,000 and £2,500 a year in rental income then you need to contact HMRC
- Earn between £2,500 and £9,999 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
If your allowed expenses are higher than your income, you’ll have made an Income Tax loss. This is common in the first year of owning a rental property, due to the additional costs of purchasing and refurbishing property.
If you make a loss, this can usually be relieved against future profits from your property rental business. You cannot write your property losses off against any other type of income that you have.
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 of the current year to 5th April of the following year. 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 risk that you’ll make an avoidable 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 through a limited company. You can find out more in our guide: How Does a Buy-to-Let Limited Company Work?
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.
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 as 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?
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?
Mortgage interest - learn about the new tax credit system below
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
Landlord Tax Credits for Mortgage Interest
Over the last few years, the Government phased out the amount of mortgage interest relief you could claim while simultaneously introducing a new tax relief. This new kind of tax relief is called a "tax credit".
How Landlord Tax Credits Work
The tax credit you receive is essentially 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
- Your total mortgage interest is included in your net income, but you receive some tax relief on your mortgage interest in the form of a tax credit
- You 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
For more landlord tax advice 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 in 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 a limited company, as the taxation of rental income from limited company-owned properties differs from those owned by private landlords. You don’t pay any Income Tax on rental income from buy-to-lets owned by limited companies. You pay Corporation Tax instead. 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 25% (2023/24).
This means it can work out cheaper, which is one of the main reasons many landlords consider using a limited company.
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: How Does a Buy-to-Let Limited Company Work?
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) when you purchase a property in the UK valued above a certain amount. 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 - such as second homes, holiday lets and buy-to-lets - in England and Northern Ireland pay additional Stamp Duty in the form of a 3% surcharge.
Ready to Buy-to-Let?
Talk to one of our advisers on 0330 433 2927.
We'll help you figure out what product is right for you, explain the buy-to-let mortgage eligibility criteria you need to meet and give you bespoke advice on all your options - such as owning a buy-to-let in your personal name vs through a limited company, whether a porfolio landlord mortgage deal could be suitable, interest-only mortgages vs repayment and more.
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.