Tax on rental income

When you rent out a property, you may have to pay tax and/or National Insurance – but this amount depends on how much you’re earning from being a landlord, and what allowable expenses you’re claiming for.

How much will I pay?

If your profits from renting are £6,475 per year (or more), and what you do counts as a business, you’ll have to pay Class 2 National Insurance – just as a self-employed person would.

Running a “property business” means all of the following will apply:

• Being a landlord is your main job
• You rent out more than one property
• You’re buying new properties to rent out

Class 2 National Insurance is usually paid through Self Assessment.

If your profits from property are under the £6,475, you can choose to make voluntary Class 2 National Insurance payments – which can be helpful if you want to ensure you get full State Pension.

If you’re not running a business (e.g. you only rent out a single house, and being a landlord isn’t your main job) you don’t pay National Insurance tax, even if you do things like arranging repairs, advertising for tenants or setting up tenancy agreements.

If you’re renting property out in Scotland, the National Insurance rates and rules are the same – more info on mygov.scot.

Property you personally own

The first £1,000 of your income from property is always tax-free – this is called your “property allowance”.

However, you must report your income on a Self Assessment tax return if it’s:

• £2,500 to £9,999 after allowable expenses
• £10,000 or more after allowable expenses

Do live-in landlords have to pay tax on rental income?

If you’re a landlord sharing your home with a lodger, you don’t have to pay tax on your extra income as long as it’s below £7,500 – as per the Rent a Room scheme guidelines. You can find out more about the scheme and download our free guide.

If your rental income is above £7,500 you will have to pay tax, but you have two options:

• Pay tax on your actual profit from the property (calculated as income received, minus allowable expenses)
• Pay tax on the gross (before tax) income minus the tax-free (£7,500) threshold, without including expenses

If you use the Rent a Room scheme but earn above the tax-free threshold of £7,500, you must let the tax office know.

How to declare unpaid tax

If you haven’t paid the tax you should on rental income in previous years, you can declare this to HMRC. This is a good idea, as any penalty you pay will be lower than if HMRC found out about the income themselves.

The costs you can claim to reduce tax

You can claim costs for “allowable expenses” on residential property to reduce your tax payments. These are generally classified as things you need to spend money on in the day-to-day running of a property:

• Letting agency fees
• Legal fees
• Accountancy fees
• Building and contents insurance
• Interest on property loans
• Maintenance and repairs
• Ground rent
• Utility bills
• Service charges
• Council Tax
• Cleaning and gardening (if you pay for these services)
• Mortgage interest relief

Note: you can’t claim for these allowable expenses if you’ve bought a property to renovate, or renovated a property beyond normal repairs for wear and tear.

Tax relief on domestic items

You may be able to claim tax relief on any money spent replacing domestic items for tenants. This includes things like:

• Beds
• Sofas
• Carpets
• Fridges

These items must have been bought specifically for your tenants to use, and any replaced items must be removed and no longer used.

This relief is currently only available for items bought in the 2016-17 tax year.

How to work out your profit

To work out your net profit (or loss) for all of your lettings:

• Add together all your rental income
• Add together all your allowable expenses
• Take the expenses away from the income

Can I claim tax relief on mortgage interest in the UK?

As of 6 April 2017, finance cost relief for individual landlords in the UK was restricted. Essentially, this measure restricted the amount of available relief to the basic rate of Income Tax – this was brought in to make the tax system fairer for all landlords (as opposed to giving more generous treatment to higher income landlords).

You can find out more about these changes on gov.uk.