When you let property, you are in receipt of rental income and in most cases, you will need to declare this to HMRC and pay any tax due.
The actual tax on rental income will be either nothing, 20%, 40% or 45% of the taxable profit depending on the amount from your other sources of income.
How is the tax on rental income worked out?
Up until 2017 you simply took the rental income received/due and deducted all property costs including mortgage interest, normally up to the 5th of April each year. You either made a profit or a loss. If you made a profit this would be added to any other income you had received in the same tax year, and you would pay tax at your marginal rate. If you made a loss, you would carry the loss forward to set off against the next available profits.
From 2020 mortgage interest is no longer allowed as a direct cost. Instead, you get tax relief for mortgage interest as a tax credit of 20% of the actual interest paid. To see what rate of tax you would pay take a look at the examples below.
0% tax if you have no other income
If you let out a room in your house to a lodger and the rent is less than £7,500 you can claim rent a room relief and pay no tax.
If you have no other income at all, except rental income from letting a property and the rental income profit is less than £12,570 (2022-23) then the tax payable is nil.
Example:
Miss Jones is aged 57 and relies solely on the rental income she receives from a rental property. Her income and expenses are as follows:-
| Rental income | £18,000 |
| Less: Overheads | |
| Repairs, insurance, travel costs, etc | £5,500 |
| Net income | £12,500 |
| Personal tax allowance used | £12,500 |
| Taxable income | £0 |
In this case, it does not make any difference if there is a mortgage as the direct overheads result in a profit of less than the personal tax allowance of £12,570.
For a full list of all overheads please see the following guide to Landlord Tax.
20% Tax if your total income is less than £50,270
If you have other income from either employment, self-employment or savings and investments but which together with the taxable income from letting a property comes to less than £50,270 (2022-23) you will pay tax at 20% on the taxable income from the property.
Example:
Mr Palin is aged 35 and is employed with a salary of £30,000 per annum. He has one rental property on which the rental income and expenses are as follows:
| Rental income | £15,000 |
| Less: Overheads | |
| Repairs, insurance, letting agent fees | £3,500 |
| Net income (before mortgage interest) | £11,500 |
| Mortgage interest paid | £5,000 |
| Net income after mortgage interest | £6,500 |
His tax would be worked out as follows:-
| PAYE income | £30,000 |
| Rental income | £11,500 |
| Total taxable income | £41,500 |
| Less personal tax allowance of | £12,570 |
| Tax payable on 28,930 | |
| Tax @ 20% | £5,786 |
| Less tax paid on PAYE income at source | £3,486 |
| Less tax credit for mortgage interest paid | |
| (20% of £5,000) | £1,000 |
| Net tax payable£ | £1,300 |
A 20% taxpayer will therefore still get full tax relief on mortgage interest. The tax on his net income after all deductions including mortgage interest is £6,500. At 20% the tax is £1,300.
40% Tax if your income is between £50,270 to £150,000
As above, if you have other income from either employment, self-employment or savings and investments but which together with the taxable income from letting a property comes to more than £50,270 but less than £150,000 (2022-23) you will pay tax at 40% on the taxable income from the property.
Example:
Mr Short is aged 45 and is employed with a salary of £65,000 per annum. He has two rental properties on which the rental income and expenses are as follows:
| Rental income | £25,000 |
| Less: Overheads | |
| Repairs, insurance, letting agent fees | £7,500 |
| Net income (before mortgage interest) | £17,500 |
| Mortgage interest paid | £8,000 |
| Net income after mortgage interest | £9,500 |
His tax would be worked out as follows:-
| PAYE income | £65,000 |
| Rental income | £17,500 |
| Total taxable income | £82,500 |
| Less personal tax allowance | £12,570 |
| Tax payable on 69,930 | |
| Tax @ 20% on £37,700 | £7,540 |
| Tax @ 40% on £32,230 | £12,892 |
| Less tax paid on PAYE income at source | -£13,432 |
| Less tax credit for mortgage interest paid | |
| (20% of £8,000) | -£1,600 |
| Net tax payable | £5,400 |
A 40% taxpayer is therefore now worse off than before 2021. In the above case, his tax bill has increased by £1,600. For this reason, if you are a higher-rate taxpayer you should consider buying property through a limited company.
45% Tax if your income is more than £150,000
For anyone with a combined income of more than £150,000 the effective tax rate is 45% and you should seriously consider buying property through a limited company. Here’s why:-
Example:
Mr Edwards is aged 49 and is employed with a salary of £175,000 per annum. He has five rental properties on which the rental income and expenses are as follows:-
| Rental income | £50,000 |
| Less: Overheads | |
| Repairs, insurance, letting agent fees | £10,000 |
| Net income (before mortgage interest) | £40,000 |
| Mortgage interest paid | £15,000 |
| Net income after mortgage interest | £25,000 |
His tax would be worked out as follows:-
| PAYE income | £175,000 |
| Rental income | £25,500 |
| Total taxable income | £200,000 |
| Less personal tax allowance | nil |
| Tax payable on | £200,000 |
| Tax @ 20% on £37,5000 | £7,500 |
| Tax @ 40% on £112,500 | £45,000 |
| Tax @ 45% on £65,000 | £29,250 |
| Less tax paid on PAYE income at source | -£63,750 |
| Less tax credit for mortgage interest paid | |
| (20% of £15,000) | -£3,000 |
| Net tax payable | £15,000 |
A 45% taxpayer is therefore now much worse off than before 2021. In the above case, his tax bill has increased by £3,750. If you are an additional rate taxpayer you should seriously consider buying property through a limited company.
If you don’t have a tax adviser yet who handles all of your landlord-related tax queries then please feel free to get in touch on 0800 907 8633, via tax@fixedfeetr.com or via our online contact form.
If you found this article informative, then why not read all about property income allowance or how to avoid inheritance tax on a property next?
The taxation of rental income in the UK is a complex system governed by various rules and regulations. As an expert in property taxation, I've closely followed the changes implemented in recent years. Let's break down the key concepts and information outlined in the article:
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Taxation Basis Before 2017: Rental income was calculated by deducting property costs, including mortgage interest, up to the end of the tax year (April 5). Profits were added to overall income, taxed at the marginal rate; losses could be carried forward for future deductions.
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Changes in 2020: Mortgage interest deduction shifted. Instead of direct cost deduction, landlords now receive a 20% tax credit on the actual interest paid.
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Tax Rates Based on Income and Rental Profits:
- 0% Tax Rate: If rental income is the sole income and below £12,570 (2022-23) or if the total income is less than £7,500 under the Rent a Room Relief scheme.
- 20% Tax Rate: When the total taxable income, including rental profits, is under £50,270 (2022-23).
- 40% Tax Rate: For incomes between £50,270 and £150,000 (2022-23).
- 45% Tax Rate: When the combined income exceeds £150,000.
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Illustrative Examples:
- Miss Jones' situation reflects no tax liability due to rental income being below the personal allowance.
- Mr. Palin, a taxpayer in the 20% bracket, receives full tax relief on mortgage interest, paying £1,300 on his net income.
- Mr. Short, taxed at 40%, experiences a £1,600 increase in tax due to the new regulations, prompting consideration of property ownership through a limited company.
- Mr. Edwards, taxed at 45%, faces a substantial increase in tax liability, emphasizing the advantage of property ownership through a limited company for high-income individuals.
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Considerations for Higher-Rate Taxpayers: With changes increasing tax liabilities, higher-rate taxpayers may benefit from property ownership through limited companies to mitigate taxes.
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Tax Adviser Recommendation: The article advises seeking professional tax advice for landlord-related tax matters.
In essence, the taxation of rental income has undergone significant changes, particularly affecting mortgage interest deductions and tax rates based on total income. The delineation of tax brackets and the consideration of property ownership through limited companies are vital considerations for landlords in managing their tax liabilities effectively.
