Navigating the world of property rental comes with its own set of tax implications. Whether you’re a seasoned landlord or just dipping your toes into the rental market, it’s crucial to stay on top of your Income Tax obligations. To help, Sarah Clarke-Rae offers a comprehensive overview of the key tax considerations for landlords.
How do I pay Income Tax as a landlord?
First things first, you’ll need to register with HMRC. This ensures you receive a tax return and are able to pay Income Tax on your rental profits (or claim losses!).
You’ve got until 5 October after the end of the tax year in which you start renting out your property to notify HMRC. So, if you began renting in the 2024/25 tax year, make sure to register by 5 October 2025.
Any Income Tax due on your rental profits is usually payable by 31 January following the end of the tax year of the rental profit (so 31 January 2026 if profits were in the 2024/25 tax year), but depending on the size of the tax liability, and your other income, you may have to make payments on account towards the next tax year as well.
What Income Tax rates will apply to me?
The amount of Income Tax you’ll pay on your rental profits depends on your overall income, including earnings from any employment or pensions, and other investment income. The rates for the 2024/25 tax year are as follows:
- Up to £12,570: Nil (personal allowance)
- £12,570 – £50,270: 20%
- £50,270 – £125,140: 40%
- Over £125,140: 45%
Do note, if your income exceeds £100,000, your personal allowance begins to taper off. Non-UK residents may also be subject to different tax rates and rules.
When should I report my rental profits?
You’ll need to report your rental income annually as part of your tax return. This is generally required to be submitted to HMRC online by 31 January following the end of the relevant tax year.
However, Making Tax Digitial (“MTD”) is coming! MTD will require landlords to maintain digital records and update HMRC each quarter using compatible software. HMRC’s current position is that landlords with rental income over £50,000 will need to use MTD from April 2026, and landlords with rental income over £30,000 will need to use MTD from April 2027. At the moment, this is a reporting requirement only, but we anticipate that HMRC, at some stage, may seek to obtain tax payments on profits throughout the tax year.
How is rental profit calculated for tax purposes?
Rental profit is the difference between your rental income and allowable expenses. The tax year runs from 6 April to 5 April, and expenses you can deduct include costs such as repairs, redecorating, and letting agent fees. The key is to keep thorough records and ensure you’re claiming all allowable deductions.
Knowing what is allowable to offset against income, compared to what is more ‘capital’ in nature and may not be immediately deductible, is one of the most difficult areas in tax. There is an abundance of guidance and caselaw in this area, and it can be confusing! We can guide you on this and ensure you’re claiming what’s allowed.
Mortgage Interest Relief
If you’re a landlord with a mortgage on your rental property, it’s important to be aware of changes to mortgage interest relief. Since April 2020, relief has been restricted to the basic rate of 20%, which may impact your overall tax bill.
What is the Property Allowance?
The property allowance is a £1,000 tax-free allowance that can be used to offset your rental income. This can be particularly useful if you have minimal expenses. However, if your expenses exceed this allowance, it would be more beneficial to claim actual expenses rather than the property allowance. Just be aware that if you run two businesses, you can only claim the allowance for one.
Do I need to pay tax if I make a rental loss?
Even if your rental business operates at a loss, you still need to report this to HMRC. No tax will be due, but the loss can be carried forward to offset against future rental profits, but unfortunately, you cannot offset rental losses against other types of income.
If you’re unsure about any aspect of your Income Tax obligations or need help registering for self-assessment, we’re here to help. Feel free to reach out to Sarah Clarke-Rae for expert advice tailored to your situation.
