In short: Rental profit (income minus allowable expenses) is added to your other income and taxed at your marginal Income Tax rate, 20%, 40% or 45%, reported through a Self Assessment tax return by 31 January each year. Mortgage interest is not an allowable expense; it instead gets a 20% tax credit under Section 24. If you’re already over £50,000 in gross rental/self-employed income, Making Tax Digital for Income Tax has applied to you since April 2026, meaning quarterly digital updates instead of one annual return. Miss the deadlines and penalties stack up fast, but HMRC will usually agree a Time to Pay instalment plan if you ask before, not after, the bill lands.
The basic mechanics
Rental profit is taxed as part of your total income, not as a separate “property tax.” You calculate it as:
Rental income − allowable expenses = rental profit, which is then added to your salary, dividends, pension income and anything else, and taxed at whatever band that total falls into: 20% basic rate (up to £50,270), 40% higher rate (£50,271–£125,140), or 45% additional rate (above £125,140). The personal allowance of £12,570 is frozen, and it tapers away entirely by £125,140, creating an effective 60% marginal rate on income between £100,000 and £125,140, which catches out landlords with rental profit sitting on top of a good salary.
From April 2027, this changes for property income specifically: following the Autumn Budget 2025, the government is introducing separate, higher tax rates on rental profits, 22%, 42% and 47% (two percentage points above the equivalent employment/pension rates), expected to raise around £500 million a year. For the 2025/26 and 2026/27 tax years, ordinary rates still apply to rental income; the higher rates land from 2027/28.
Allowable expenses vs disallowed costs
Allowable running costs include letting agent fees, landlord insurance, repairs and maintenance (not improvements), ground rent and service charges, accountancy fees, and utility bills you pay on the tenant’s behalf. What you cannot deduct as an expense is mortgage interest and other finance costs, that’s been the case in full since April 2020 under Section 24 (see our guide to Section 24 and mortgage interest relief). Instead, individual landlords get a flat 20% tax credit applied to the tax bill, regardless of whether they’re a 20%, 40% or 45% taxpayer. This is the single biggest source of landlord frustration with the current system, because it means tax is charged on turnover-like profit figures that don’t reflect real cash profit once a mortgage is factored in.
The £1,000 property allowance
If your gross rental income (before expenses) is £1,000 or less in a tax year, it’s tax-free and you don’t need to report it at all. If it’s above £1,000, you can choose to deduct a flat £1,000 allowance instead of your actual expenses, useful only if your real costs are below £1,000, which is rare for anyone with a mortgage. You cannot claim both the allowance and actual expenses on the same source of income.
Reporting: Self Assessment and the shift to Making Tax Digital
Traditionally, landlords report via a Self Assessment return (SA100 plus the SA105 property pages) by 31 January following the end of the tax year (5 April). That deadline structure still exists, but Making Tax Digital for Income Tax (MTD IT) has now changed things for many landlords:
- From 6 April 2026: mandatory for landlords and sole traders with qualifying income (gross rental plus any self-employment income) over £50,000.
- From April 2027: threshold drops to £30,000.
- From April 2028: threshold drops to £20,000.
Under MTD, you keep digital records and send quarterly updates to HMRC through compatible software, followed by a Final Declaration replacing the old annual return. If your income is under the current threshold, you can still file the traditional way for now, but the trend is clearly toward everyone being pulled in eventually.
Penalties for getting it wrong or late
HMRC’s penalty regime is unforgiving of drift:
- £100 automatic penalty the day after the filing deadline, even if no tax is owed.
- £10 per day after 3 months late, up to a 90-day maximum of £900.
- Further £300 or 5% of tax due (whichever is greater) at 6 months.
- Another £300 or 5% at 12 months, rising much higher for deliberate non-disclosure.
- Late payment penalty of 5% of unpaid tax at 30 days, with further 5% charges at 6 and 12 months.
- Interest on late payment currently runs at 7.75% (Bank of England base rate plus 4%).
When the bill is bigger than you can pay
Landlords who’ve under-declared for years, often after discovering they should have registered for Self Assessment much earlier, can face genuinely enormous back-tax bills once HMRC investigates, sometimes running into tens of thousands of pounds with interest and penalties layered on top. HMRC’s Time to Pay service lets you spread a debt under £30,000 over up to 12 months via the online self-serve tool, provided you set it up before penalties escalate, this stops further late-payment penalties, though interest keeps accruing. For larger, more complex debts, you need to call HMRC directly and negotiate a bespoke arrangement; approval isn’t automatic, and HMRC can refuse a plan if it doesn’t believe the proposal is realistic or if there’s no clear ability to pay, which is why proactive contact, ideally before the debt exists at all, matters far more than waiting for a demand letter.
The practical lesson: register for Self Assessment the moment you start letting a property (deadline is 5 October following the tax year you started), keep clean digital records from day one, and if you fall behind, contact HMRC yourself rather than waiting to be found.
Related reading
Sources
- Work out your rental income when you let property, GOV.UK
- Find out if and when you need to use Making Tax Digital for Income Tax, GOV.UK
This is general information, not legal, tax, or financial advice. Figures and rules referenced are accurate to the best of available information as of July 2026 unless stated otherwise. Tax rules depend on personal circumstances, always check current HMRC guidance (gov.uk) or consult a qualified accountant/tax adviser before making decisions.
Last Updated on September 21, 2026