How to calculate tax on your rental income

If you’re renting property owned by you, rather than your business or company, you could qualify for income tax relief. However, this depends on the kind of rentals you are running. There are also many costs associated with rentals that can lower your taxable profit, which we outline further on.

Do I need to declare rental income to HMRC?

If you personally own the property, the first £1,000 of rental income you make is tax-free. HMRC calls this your ‘property allowance’.

Thereafter, you will be paying tax as usual on this income, and must declare it to HMRC if it falls between £1,000 and £2,500 a year.

You will also have to report this income on your Self Assessment tax return if it is above £2,500 after expenses and when it exceeds £10,000 before expenses.

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Rent a Room Scheme

If you rent out a room in your home, you may be eligible for £7,500 of tax-free rental income. You can access this scheme if you are:

  • A resident landlord, meaning the property you are renting out is also your main home. This applies whether or not you actually own the home.
  • Running a bed & breakfast or a guest house

Property business

If you’re running a property business, you will have to pay income tax as usual (or corporation tax if your business is a company). However, if your profits are more than £11,908 a year, you will also have to pay Class 2 National Insurance.

How do I work out my rental income for tax?

You can calculate your total taxable rental income by subtracting your tax-deductible expenses from your profit. There are two types of expenses which qualify for tax relief – allowable expenses and domestic items.

Your tax relief on expenses will be limited if you rent the property at below market rates, as we explain here.

paying tax on UK rental income; london accountant

allowable expenses

These are expenses involved in the day-to-day running of the property, and do not include renovations, improvements, or buying new properties.

Allowable expenses include:

  • letting agents’ fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountants’ fees
  • buildings and contents insurance
  • maintenance and repairs to the property (but not improvements)
  • utility bills, like gas, water and electricity
  • rent, ground rent, service charges
  • Council Tax
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery and advertising

domestic items

You can also deduct expenses for replacing ‘domestic items’. These are items and furnishing bought for use by tenants only, and the item being replaced must not still be used in that property. This relief applies to purchases since April 2016.

Domestic items include:

  • beds
  • sofas
  • curtains
  • carpets
  • fridges
  • crockery and cutlery

Declaring unpaid tax

HMRC has a scheme for you to declare any unpaid tax on rental income called the Let Property Campaign. This applies to individual landlords who have forgotten, miscalculated, or failed to pay tax on rental income. It does not include companies.

This campaign is part of HMRC’s efforts to target residential landlord tax evasion. Making a voluntary disclosure will give you far better repayment options and lower fines.

Frequently Asked Questions (FAQs)

What is rental income?

Rental income is any payment you receive for the use or occupation of property. This includes not just rent payments, but also any amounts paid to you for the use of your property.

How do I calculate my rental income tax?

To calculate your rental income tax, you need to:

  1. Total your rental income for the year.
  2. Subtract allowable expenses (e.g., maintenance, repairs, property management fees).
  3. Apply any available tax reliefs.
  4. The resulting amount is your taxable rental profit, which is then taxed at your applicable income tax rate.

What expenses can I deduct from my rental income?

You can deduct expenses such as:

  • Maintenance and repairs
  • Property management fees
  • Mortgage interest (subject to limitations)
  • Insurance
  • Utility bills (if paid by you)
  • Legal fees for lets of a year or less, or for renewing a lease of less than 50 years

Is mortgage interest fully deductible?

No, as of April 2020, you can no longer deduct mortgage interest from rental income to reduce your tax bill. Instead, you receive a tax credit based on 20% of the mortgage interest payments.

What records should I keep for my rental income and expenses?

You should keep records of:

  • All rental payments received
  • Receipts for expenses incurred
  • Bank statements showing transactions related to the rental property
  • Details of any other income received from the property (e.g., insurance claims)

Do I have to pay National Insurance on my rental income?

You might need to pay Class 2 National Insurance if your profits are £6,725 or more a year and it counts as running a business. This could be the case if you’re renting out more than one property.

Need expert assistance?

If you need advice or assistance with working out taxable income, making Self Assessment tax returns, or declaring unpaid tax, CIGMA Accounting would be happy to help.

Our accountants are registered with the Chartered Institute of Management Accountants, one of the leading professional accountancy bodies in the UK.

Contact us here for a free quote, or use the form below.