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Income Tax essentials for residential landlords

Mark Stemp, Partner, Private Clients
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Mark Stemp, Partner and tax specialist looks at the essential Income Tax considerations for residential landlords. Make sure you're up to speed with this handy overview of all the essential tax details associated with renting out a property.

So, you’ve made the decision to rent out a property. To help you navigate your Income Tax and rental profit, I've provided answers to some of the most common tax questions below.

How do I pay the income tax?

You will need to register with HMRC so you are issued with a tax return and to pay the Income Tax. You will be required to let HMRC know that you have rental income. You usually have until 5 October following the end of the tax year in which you begin to rent the property to do this. For example, if you need to complete a tax return for the 2022/23 tax year, you must register by 5 October 2023.

How much Income Tax do I pay?

Any rental income after most expenses will be charged to Income Tax at your marginal income rate. The marginal tax rate depends on all of your other income. This includes the income from your job and pension.

The tax rates for 2022/23 for most people are currently:

  Income: Under £12,570  Tax Rate: Nil (personal allowance) 
  Income: £12,570 - £50,270  Tax Rate: 20% 
  Income: £50,270 - £150,000  Tax Rate: 40% 
  Income: Over £150,000   Tax Rate: 45% 

The tax rates for 2023/24 for most people will be:

  Income: Under £12,570  Tax Rate: Nil (personal allowance) 
  Income: £12,570 - £50,270  Tax Rate: 20% 
  Income: £50,270 - £125,140 Tax Rate: 40% 
  Income: Over £125,140               Tax Rate: 45% 

There are different rates of tax for dividend income.

Income Tax is calculated based on the entries you make on your tax return, which will show your income from all sources including any employment income you may have. Tax is payable under self-assessment on 31 January and 31 July each year.

Those with income above £100,000 will lose their personal allowance.

Non-UK resident taxpayers may have different income tax rules and rates.

When do I need to tell HMRC about my annual rental profits?

You will need to report your rental profits to HMRC annually on your tax return. Tax returns are submitted online by 31 January following the end of the tax year in which you received rental income.

How to I calculate my rental profit upon which I pay income tax?

You need to calculate your rental profit on a tax year basis, from 6 April to the following 5 April. Rental profit is calculated as the difference between the rental income and most expenses.

The expenses that are deducted from income include repairs, decorating and letting agent fees.

What are the mortgage interest relief rules?

Landlords of residential property now face a restriction of relief on their costs of finance, including interest paid to the bank.

From April 2020, relief for their costs of finance was restricted to 20% of the interest paid.

What is the property allowance?

If you do not incur any rental expenses, or the rental expenses you incur are less than £1,000, you can instead use the tax-free property allowance of £1,000, which can be deducted against your rental income.

If you use the allowance, you can deduct up to £1,000, but not more than the amount of your income.

If your expenses are more than your income, it may be beneficial to claim the expenses instead of the allowance.

However, if you have two businesses and claim the property allowance in one business, you may not claim actual expenses in respect of the other business.

Do I still have to pay Income Tax if I make a rental loss?

Any losses arising from the rented property are still reported to HMRC on a tax return. They have to be carried forward and offset against any future profits arising from your rental business and cannot be offset against your other income.

Next steps

If you have any questions about registering for self-assessment or Income Tax for landlords, do please get in touch with Mark Stemp, Partner, Private Clients

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Mark Stemp
Mark Stemp
Partner, Private Clients