Renting out property in the UK comes with tax obligations that can be complex to navigate. Understanding the calculations and reliefs applicable to your specific type of property is crucial to avoid any surprises. Stay informed and ensure compliance by considering these key factors when it comes to paying tax on your rental income.
And consult Tax Natives for expert guidance and maximise your rental income benefits. Start optimising your tax strategy today with Tax Natives.
Do you have to pay income tax on rental income?
When it comes to rental income, it's important to consider more than just the rent you receive. Additional earnings from services or deductions like deposit retention contribute to your total rental income. For example:
- Rental income: £7,500
- Additional deposit retention for repairs: £500
- Earnings from cleaning services: £200
- Total rental income: £8,200
When to declare tax on rental income?
Great news! As a personal property owner renting out your property, you have a £1,000 property allowance, which means you can receive that amount of income tax-free without declaring it to HMRC (HM Revenue & Customs).
However, if your rental earnings, after allowable expenses, fall between £1,000 and £2,500, you should inform HMRC directly. They might be able to collect the tax owed through the PAYE system. Income exceeding £2,500 must be declared on a Self-Assessment tax return.
How much rent is taxable?
You are only taxed on the profit you make from renting out your property, which is your total rental income minus allowable expenses.
Allowable expenses typically include maintenance and management costs for your property, such as letting agent fees, landlord insurance, repairs, utility bills, council tax, and services like cleaning and gardening.
If you own multiple rental properties in the UK, you can combine all your allowable expenses.
Depending on the type of property you own, you may be eligible for specific tax reliefs. For example, if you rent out residential property or a furnished holiday let, you can claim "replacement of domestic items relief" to cover the cost of replacing items you provide, like sofas, curtains, and carpets.
If you own a holiday let, you can also deduct capital expenses for equipment necessary to run your rental, such as air conditioning and CCTV.
Commercial property owners can benefit from capital expenses for assets like lifts, escalators, and electrical systems.
How much tax will I have to pay on my rental income?
Tax rates in the UK are determined by income bands. There are four bands:
- Personal allowance: No tax is payable on earnings up to £12,570.
- Basic rate: Earnings between £12,571 and £50,270 are taxed at a rate of 20%.
- Higher rate: Earnings between £50,271 and £150,000 are taxed at a rate of 40%.
- Additional rate: Earnings over £150,000 are taxed at a rate of 45%.
Keep in mind that rental income can push you into a higher tax band. For example:
- Day job earnings: £45,000
- Rental income: £8,000 (after deducting allowable expenses of £1,000)
- Total rental income: £7,000
- Total income: £52,000
- As the higher rate threshold starts at £50,271, you will pay 40% tax on the £1,729 that exceeds the limit.
Starting from April 2023, the basic rate of tax will be 19%, and the additional rate of 45% will be eliminated.
Can I still get buy-to-let mortgage tax relief?
As of April 2020, mortgage tax relief for rental properties has been phased out. You can no longer deduct mortgage interest from your rental earnings. Instead, you will receive a 20% tax credit.
Do I have to pay National Insurance payments if I run a property business?
If your property rental business generates profits exceeding £6,725, you must pay Class 2 National Insurance. However, if your profits are below this threshold, you can choose to make voluntary National Insurance payments, which will allow you to claim the full State Pension.
To be classified as running a property business, you must meet all three of these conditions:
- Your primary occupation is being a landlord.
- You let out multiple properties.
- You purchase properties with the specific intention of renting them out
When do I pay tax on rental income?
You’ll need to pay Tax must be paid on the profits you earn during each financial year, which runs from 6 April to 5 April of the following year.
If you choose to complete a paper Self-Assessment tax return, it must be submitted by 31 October of the subsequent financial year. Online assessments, on the other hand, have a submission deadline of 31 January. For instance, paper returns for the year 2021-2022 should be submitted by 31 October 2022, while online submissions can be made until 31 January 2023.
Completing a tax return for rental income
To ensure compliance with tax regulations, it is important to inform HMRC about any rental income by 5 October following the end of the tax year (5 April). If you earn money from renting out property, you will likely need to complete a self-assessment tax return.
The deadline for paper tax returns is 31 October, while for online returns, it is 31 January of the following year.
For individuals with a total income from UK property of £10,000 or more (before expenses), completing the main tax return is necessary.
If your rental income exceeds £2,500 (after deducting rental expenses), you are also required to complete a tax return.
However, if your rental income is under £2,500, HMRC may be able to collect the tax through the PAYE system if you already pay tax through sources such as your salary or pension. Contact HMRC for further information.
Declaring losses on rental income
Losses from rental properties in the UK can be carried forward to offset against future profits from your UK properties. For example, if you had rental income of £8,000 in the 2022-23 tax year but claimable expenses worth £10,000, you would have a loss of £2,000 for that year.
However, you cannot use this loss to reduce your tax bill from other sources of income, such as dividends or pension income for that year.
Instead, in the following tax year (2023-24), if you made rental profits of £5,000, you could deduct the previous year's loss of £2,000. This means you would only owe tax on rental profits of £3,000.
Paying tax when you sell a rental property
When you sell a property that you have been renting, you will usually be subject to capital gains tax (CGT). Different rules apply if the property has been your home at any point.
For properties that are not your main residence, the sale is treated similarly to any other asset sale. As a basic-rate taxpayer, you'll pay 18% CGT, while higher or additional-rate taxpayers will pay 28% CGT.
Between 6 April 2020 and 26 October 2021, there was a 30-day window to pay your CGT bill for property sales. However, after 26 October 2021, the deadline for reporting and paying CGT on the property is extended to 60 days.
Take Control of Your Rental Income Taxes Today
Navigating the tax obligations associated with rental income in the UK can be complex. To ensure compliance and maximise your financial benefits, it is essential to have a clear understanding of the calculations, reliefs, and deadlines that apply to your specific situation.
Don't leave it to chance—seek the guidance of a tax professional who can provide expert advice tailored to your needs. Start optimising your UK tax strategy with Tax Natives today and gain confidence in managing your rental income.