If you are looking to pay tax on the rental income you’ve made from your property, it is worth noting what kind of taxes are available to landlords in the UK.

What are the different taxes you pay on rental income?

To begin, assess what kind of property tax is important to have on a property so you can start working out what to pay to HMRC.

When it comes to rental income, the only type of tax that is payable by law at the moment is Property Income Tax but it is charged at different rates.

What is property Income Tax?

Property income tax is the only tax that is charged on the rental income of property and the rates vary depending on if the property

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Property income tax in a limited company

As a landlord in the UK, you have the option to structure your property business either as a limited company or hold the properties in your personal name.

The ownership structure you choose will determine the type of tax you pay and the amount, so it’s crucial to perform the necessary calculations to determine the most suitable option for your circumstances.

property income tax costs

If you opt to set up as a limited company, you’ll be required to pay Corporation Tax on the profits generated by your property business. The Corporation Tax rates are as follows:

  • For profits up to £50,000, a flat rate of 19% tax applies on all profits.
  • For profits between £50,000 and £250,000, a rate of 25% is applicable, with eligibility for marginal relief.
  • For profits exceeding £250,000, a rate of 25% is charged on all profits, without the benefit of marginal relief.
Income Bracket Tax Rate Taxable Amount Tax Owed
£0 – £12,570 (Personal Allowance) 0% £12,570 £0
£12,571 – £50,270 (Basic Rate) 20% £37,699 £7,540
£50,271 – £81,000 (Higher Rate) 40% £30,730 £12,292

Corporation Tax rates are generally more favorable than the higher personal income tax rates of 40% and 45%, which apply to high earners. For this reason, many property investors choose to establish limited companies for their property businesses.

Additionally, limited companies are not subject to Capital Gains Tax (CGT) when selling a property, whereas personal owners are required to pay CGT on any gains realised from the sale.

Get the rates of capital gains tax on the .gov website

Another advantage of operating as a limited company is the ability to retain profits within the business and utilise them as a deposit for acquiring additional properties, effectively avoiding the need to pay tax on those profits.

Property income tax if your property is in a personal name

In the UK, property income tax is calculated based on the rental income earned from properties owned by individuals. Let’s consider an example to understand how this tax is charged when a property is owned personally.

Suppose you have an annual rental income of £36,000 from your buy-to-let property. After deducting allowable expenses amounting to £5,000, your net profit from the property comes to £31,000.

Additionally, you earn £50,000 from other sources, bringing your total taxable income to £81,000 for the tax year.

Now, let’s break down how your property income tax is calculated:

Income Bracket Tax Rate Taxable Amount Tax Owed
£0 – £12,570 (Personal Allowance) 0% £12,570 £0
£12,571 – £50,270 (Basic Rate) 20% £37,699 £7,540
£50,271 – £81,000 (Higher Rate) 40% £30,730 £12,292

This results in a total income tax bill of £19,832.

However, since you’ve paid £20,000 in mortgage interest, you’re entitled to a tax credit of £4,000, which reduces your tax liability.

After applying the tax credit, your final tax bill amounts to £15,832.

In summary, your property income tax liability is calculated based on your total taxable income, which includes rental income from your property along with other sources of income. By deducting allowable expenses and applying tax rates according to income brackets, your tax liability is determined.

What does property income tax NOT include?

It’s essential to understand that property income tax does not cover all types of taxes related to property ownership. There are additional taxes that you should be aware of, including:

Capital gains tax

Capital Gains Tax is payable when you sell a property in your personal name and make a profit (capital gain) above a certain allowance.

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You don’t pay CGT on an ongoing basis; it’s only due when you dispose of the property.

Stamp duty and land tax

SDLT is a tax paid when purchasing a property in England or Northern Ireland (Land Transaction Tax in Wales and Land and Buildings Transaction Tax in Scotland). You don’t pay this tax on an ongoing basis; it’s a one-time payment made when buying the property.

Council tax

Council Tax is an annual tax levied on domestic properties by local authorities.

If you, as the landlord, pay council tax, utility bills, or other similar expenses on behalf of your tenant, you can claim these as allowable expenses against your rental income. However, if your tenant is responsible for paying these bills directly, you cannot claim them as deductible expenses.

property tax in the uk

It’s crucial to consult with a qualified tax professional to ensure you comply with all applicable tax regulations and take advantage of any available deductions or reliefs based on your specific circumstances.

How to work out the tax you pay on rental income

Working out the tax on your rental income can seem daunting, but following these steps will guide you through the process:

Step 1: Working out your rental income first

Before you can calculate the tax owed, you need to determine your total rental income for the tax year. This involves understanding what is included as part of rental income, and what is not.

What is included as part of rental income?

Anything charged to a tenant for the use and occupation of the property is considered rental income. This includes:

  • Rent payments
  • Non-refundable deposits or fees
  • Income from furnished or unfurnished lettings
  • Payments for use of amenities (e.g., parking spaces, storage units)
  • Income from short-term or holiday lettings
A man sitting at his desk calculating his expenses

It’s essential to keep detailed records of all payments received from tenants to accurately calculate your rental income.

What isn’t included as part of rental income?

There are certain payments received from tenants that are not considered part of your rental income. These include:

  • Refundable tenancy deposits: Deposits held as security and returned to the tenant at the end of the tenancy are not rental income.
  • Holding deposits: Any money taken as a holding deposit before the tenancy begins and later applied towards rent or returned to the tenant is excluded from rental income.
  • Payments for specific services: If you charge tenants separately for services like cleaning, gardening, or utilities (where you don’t profit from these charges), these are not considered rental income.

It’s crucial to distinguish between payments that belong to you as rental income and those that are held temporarily or passed on to third parties.

Step 2: Deducting allowable expenses on your property

After calculating your rental income, the next step is to deduct any allowable expenses incurred in running your rental property. These expenses can be subtracted from your rental income to reduce your overall taxable profits.

To illustrate how this works, let’s consider the following example:

Rental Income £12,000
Allowable Expenses:
Letting Agent Fees £1,200
Repairs and Maintenance £800
Utility Bills £600
Total Allowable Expenses £2,600
Taxable Rental Profit £9,400
Mortgage Interest Paid £3,000
Tax Credit (20% of Mortgage Interest) £600

It’s important to note that mortgage payments are no longer an allowable expense for tax purposes. Instead, you can claim a tax credit based on a percentage of the mortgage interest paid.

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Step 3: Calculating tax based on how you own the property legally  

Once you have determined your net profit after deducting allowable expenses, you need to consider whether it is more profitable to pay yourself an earned income by holding the property in your personal name.

You could also pay corporation tax by holding the property in a limited company and then paying yourself a salary or dividends.

Rental income tax if you have property in your personal name

Taxable Rental Profit £9,400
Personal Allowance £12,570
Taxable Income £0
Income Tax Payable £0

In this example, assuming you have no other earned income, your taxable rental profit of £9,400 falls within the Personal Allowance of £12,570 for the 2024/25 tax year. Therefore, you would not owe any income tax on your rental profits.

However, if you have additional earned income from a job or other sources, the profitability of holding the property in your personal name will depend on your overall taxable income and the applicable tax bands.

Rental income tax if you are keeping property in a limited company

Taxable Rental Profit £9,400
Corporation Tax Rate (2024/25) 19%
Corporation Tax Payable £1,786

If you hold the property within a limited company, you would pay corporation tax on the taxable rental profit of £9,400 at the current rate of 19% for the 2024/25 tax year. In this example, the corporation tax payable would be £1,786.

You can then choose to pay yourself a salary from the company or distribute the remaining profits as dividends, which may be subject to additional personal income tax, depending on your overall income and tax situation.

What changes the property income tax you pay?

The amount of property income tax you pay can vary depending on several factors. Here’s a breakdown of the main considerations:

Property ownership structure

One of the primary factors that determine your property income tax is whether you own the property in your personal name or through a limited company.

If you hold the property in your personal name, your rental income will be subject to income tax based on your overall taxable income and the applicable tax bands.

a house with property tax calculated

On the other hand, if you own the property through a limited company, you’ll pay corporation tax on the rental profits, and then potentially income tax on any salary or dividends you take from the company.

Everyone’s goals and risk tolerance are different, and the decision doesn’t always come down to just the financial aspect. For some, the peace of mind that comes with separating the financial asset from their personal assets and the ability to declare bankruptcy for the company can be worth paying a bit more tax.

It’s essential to seek advice from a qualified accountant to ensure you’re abiding by the law and making the most financially advantageous choice for your circumstances.

Non-UK residency

If you own a property in the UK but are not a UK resident for tax purposes, the way your rental income is taxed will be different.

As a non-resident landlord, you will be subject to the Non-Resident Landlord Scheme (NRLS), which requires your letting agent or tenant to deduct 20% tax from your rental income before paying you the remaining amount.

A flag of the United Kingdom for a property that has UK taxes

Alternatively, you can apply to receive your rental income with no tax deducted by obtaining approval from HMRC under the NRLS. This approval is granted if you can demonstrate that your UK tax obligations are up to date and that you will comply with future tax requirements.

Jointly owned property

If you jointly own a rental property with another person, the way your rental income is taxed can also be affected. In the case of jointly owned properties, each owner is taxed on their share of the rental income based on their respective ownership percentage.

For example, if you and your partner own a property equally (50/50 split), you will each be taxed on half of the rental income and allowable expenses. If the ownership is not split equally, the tax liability will be proportionate to the respective ownership shares.

These are just a few of the key factors that can impact the property income tax you pay. It’s always advisable to consult with a qualified tax professional to ensure you understand and comply with all relevant tax regulations based on your specific circumstances.

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