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
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.
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
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:
- 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.
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.
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