What is rental income tax?
As a landlord you need to pay rental income tax on the profit you make from the properties you let out. Your profit is the income you receive from your properties minus any expenses or allowances.
Last year HMRC revealed there were over 2.65million landlords in the UK, which is a pretty large chunk of the population (and that’s not including short-term holiday lets).
With each averaging about 7% profit (or yield) on their properties, it’s important to understand how much of that will need to be paid as income tax.
What counts as rental income?
As you’d guess from the name, rental income is mainly made up of rent paid by tenants. But there are a few other sources of income to take into account:
Additional services: You might offer cleaning and maintenance as part of the service.
Utility bills: If you offer bills as part of the package, this could be broadband, water, energy.
Safety deposit: Any money kept from a returnable (or non-returnable deposit).
An example of this might be that a landlord is charging a tenant £700 a month rent including bills would need to claim the total monthly payment as income. And if the tenant had to pay £200 of their safety deposit the total would come to £8,600 for the year. You can then claim back the repairs and bills as expenses when completing your self assessment tax return.
How do I know how much rental income tax to pay?
In most cases you’ll be listed as a sole trader when a landlord. If you’ve set up a limited company the properties will need to be listed as part of the company portfolio. Meaning you’d need to sell the properties to your company at the market rate, which can be a lengthy process if you do go down that route.
As a sole trader you’ll be taxed on your rental income as you would any other income. The tax bands for these are:
- Tax allowance: 0% of earnings (You’ve earned between £0 and £12,570)
- Basic rate: 20% of earnings (You’ve earned between £12,571 and £50,270)
- Higher rate: 40% of earnings (You’ve earned between £50,271 and £150,000)
- Additional rate: 45% of earnings over £150,000
Remember that your rental income tax is classed as one and the same as the rest of your income. So if you’re a landlord on the side then this could push you into an upper bracket.
Likewise if you have multiple properties, these are all lumped into one revenue stream. This means that you can deduct expenses from one property off the receipts for another. So the losses on one property can be offset by the others. (If you have shares in another rental company while letting houses personally, this is treated as a separate business).
How do I pay rental income tax?
Each year you need to fill out a self-assessment tax return. What you pay is your income tax bill minus the expenses of running your rental business. You can read more on how to complete your self-assessment tax return in this Earnr article.
The usual cut off date to complete your self-assessment is the 31st of January if you’re doing it online, and 31st of October if you’re completing the form by post.
What can I expense on rental income tax?
As a landlord you’ll have various running costs depending on the properties and tenants. You can deduct these costs from your taxable profit as long as they’re eligible expenses.
So if you earn £50,000 and you claim £9,000 in expenses, you’d only be taxed on £41,000 for the year.
For a content landlord you might expense things like:
- Maintenance
- Utilities (if included in the rent)
- Insurance
- Ground rent (if it’s an apartment)
- Cleaning
- Gardening
- Agency management fees
How can Earnr help?
Earnr makes self-employed bookkeeping easy, so that you can spend less time worrying about this kind of stuff and more time growing your business.
You can separate your business transactions from your personal ones, track your expenses and get a real-time tax estimate so you know whether or not you need to submit a tax return.
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