Tax on property and rental income: what landlords need to know

This article was written by FreeAgent’s Content team and our Chief Accountant, Emily Coltman FCA.

Whether you rent out several properties or simply let a flat to a family member, as a landlord it’s vital that you understand how your property income is taxed. In this article, we explain what taxes you’ll need to pay as a landlord and what costs you can claim to reduce your tax bill.

What taxes do landlords have to pay?

The taxes you pay on rental income can vary depending on how you manage that income, particularly whether you’re an incorporated landlord or an unincorporated landlord.

These terms can sound a bit scary, but don’t worry - we’ve got you covered. An incorporated landlord is someone who has set up a limited company to own the properties and receive the rental income from them. If you haven’t set up a limited company to own the properties, you’re an unincorporated landlord. Most landlords in the UK fall into the latter category.

You can read more about the different taxes that apply to incorporated and unincorporated landlords and how they relate to your circumstances below.

Income Tax

Landlords may have to register for Self Assessment and pay Income Tax once the amount of rental income received reaches a certain threshold. You can read more about when you have to register for Self Assessment as a landlord below.

When do you have to register for Self Assessment as a landlord?

If you’re an unincorporated landlord but you earn under £1,000 of rental income during the tax year, you don’t have to register for Self Assessment. This is because that amount would be covered by what’s known as the ‘property income allowance’ or ‘property allowance’.

If your gross property income during a tax year is between £1,000 and £2,500, you should contact HMRC to find out if you need to declare it. Your gross property income is your income from property before you subtract any allowable expenses. Allowable expenses are costs that you incur in the day-to-day running of the rental property. We’ll cover what you can claim for in more detail later in this article.

You must report your income on a Self Assessment tax return if:

• your net property income is between £2,500 and £9,999
• your gross property income is £10,000 or more

You can calculate your net property income by subtracting allowable expenses from your gross property income.

Your Self Assessment tax return is used to calculate any Income Tax and National Insurance (NI) that you owe.

Incorporated landlords who are employees of their limited company pay Income Tax through Pay As You Earn (PAYE) on any wages they take out of the company. This is handled via the company’s payroll and you do not usually need to file an individual Self Assessment tax return. However, you may need to file a Self Assessment tax return if you have received any other income that you haven’t paid tax on.

If you’re an incorporated landlord, you may also need to file a Self Assessment tax return if your company pays you dividends during the tax year. You pay Dividend Tax rather than Income Tax on dividend payments, and we'll cover this in more detail later in this article.

When is the deadline to register for Self Assessment?

Your deadline for doing this is the 5th October following the end of the tax year during which you earned the income.

For example, if you need to declare property income for the 2022/23 tax year (which ended on 5th April 2023) you’ll need to register for Self Assessment by 5th October 2023.

Which Self Assessment pages do landlords need to submit?

In addition to the main Self Assessment tax return (SA100), unincorporated landlords who need to file a tax return usually need to complete the supplementary UK Property (SA105) pages to report income from property.

However, if HMRC deems that your property income counts as ‘a trade’, then you may need to fill in an SA103 (self-employment) form rather than the SA105. Examples of when property rental might count as a trade include if you run a hotel, guest house or caravan site, or if you let out part of a business premises that’s surplus to your current needs. HMRC provides more details in their property income manual.

Depending on your circumstances, you may also need to fill in other sets of supplementary pages to report other income. If you’re in any doubt about which forms you need to submit, check with an accountant.

Self Assessment in FreeAgent

If you’re a landlord who has to submit a Self Assessment tax return, there's a version of our award-winning accounting software designed specifically for you. FreeAgent for Landlords helps you manage your property finances and lets you submit Self Assessment tax returns directly to HMRC.

National Insurance (NI)

If you’re an unincorporated landlord and your net property income is £6,725 a year or more during a tax year, you have to pay Class 2 NI if HMRC also deems that you are running a business.

Factors that HMRC are likely to take into consideration include:

• whether being a landlord is your main job
• whether you let more than one property
• whether you regularly buy new properties to let

If your net property income is under £6,275 during the tax year, you don’t need to pay Class 2 NI. However, you can still choose to make voluntary Class 2 NI payments for the year to help ensure you get the full State Pension. Most people pay the contributions as part of their Self Assessment tax bill.

If you are an incorporated landlord, your company must deduct Class 1 Employee’s NI from your wages and must also pay Class 1 Employer’s NI. Both of these are assessed through the company’s payroll. You will not usually need to file a Self Assessment tax return for yourself unless you have other income, for example, if the company pays you dividends.

If your business has any employees

If you employ any staff as part of managing your property income, whether you’re an unincorporated or incorporated landlord, you will need to register as an employer (if you have not already done so), run a payroll and make Class 1 employer’s NI contributions. You’ll also need to deduct Class 1 employee’s NI from your employees when you run payroll, and pay these to HMRC.

Please remember that if you’re an unincorporated landlord, you don’t count as an employee of your business, and your own NI and income tax will be dealt with through Self Assessment, not through payroll.

Corporation Tax

If you’re an incorporated landlord and the company you run earns rental income from a property that it owns, then this income is subject to Corporation Tax. This income should be counted the same way as any other business income and declared on the Company Tax Return you file each year on the company’s behalf.

Unincorporated landlords don’t manage their property income through a limited company and, as such, do not have to pay Corporation Tax.

Other taxes you might encounter

Depending on your circumstances, there are other taxes you may have to pay in the course of managing your property income.

Capital Gains Tax

If you’ve let out a property that isn’t your main home to a tenant or tenants, you may have to pay Capital Gains Tax on the property if you sell it for a profit. This includes:

• buy-to-let properties
• business premises
• land
• inherited property (this is different from Inheritance Tax, which we’ll talk about below)

In some circumstances, you may also be eligible to claim certain Capital Gains Tax reliefs for letting a furnished holiday home.

There are different rules if the property you’ve rented out is also your main home, so be sure to check with an accountant or HMRC if you’re in any doubt about what you need to pay.

Dividend Tax

If you’re an incorporated landlord and receive dividend payments from your limited company, these payments may be subject to Dividend Tax.

The first £500 of income you earn from dividends is tax-free (this is called the Dividend Allowance), but you may need to pay tax on any earnings above this threshold.

Unincorporated landlords don’t usually have to worry about Dividend Tax as they don’t manage their property income through a limited company and, as such, won’t receive dividend payments from the company.

Inheritance Tax

Any buy-to-let properties you own will typically form part of your estate when you die, so whoever inherits your estate may have to pay Inheritance Tax on any property you leave to them. In most cases, Inheritance Tax is taxed at 40% on estates valued above £325,000.

The rules around Inheritance Tax can be quite complicated, so we recommend speaking to an accountant or legal professional who will be able to advise you.

Costs you can claim to reduce tax

You may be able to claim certain costs associated with letting property, such as allowable expenses, to reduce your tax bill. Different rules for this apply depending on the type of property you let.

Allowable expenses

If you’re an unincorporated landlord and make income from letting out a residential property, you must pay Income Tax on your net profit. Your net profit is your profit after you’ve deducted any ‘allowable expenses’.

Allowable expenses are costs that you incur in the day-to-day running of the rental property. There are a number of different allowable expenses you can claim when calculating your net profit, including:

• mortgage interest
• maintenance and repairs to your property
• water rates, council tax and utilities such as gas and electricity
• relevant insurance policies, such as buildings, contents and public liability insurance
• costs of services relating to the property, such as payments to gardeners and cleaners
• letting agent and management fees
• accountant fees
• legal fees for letting periods of a year or less during the tax year
• legal fees for renewing a lease for fewer than 50 years during the tax year
• rent (if you’re sub-letting), ground rent and service charges
• marketing costs such as phone calls, stationery and advertising for new tenants
• the proportion of vehicle running costs used for the property rental

Capital allowances

Capital allowances cannot be claimed when you buy residential properties, or when you buy furniture to put in the property, but you may be able to claim if you let a furnished holiday home or commercial property.

If you receive income from letting a furnished holiday home, you may be able to claim capital allowances for furniture and furnishings in the property (but not for the property itself). You may also be able to claim for equipment that’s used for the property but isn’t stored inside it. Examples might include a van used to transport linen for the rental property, or large tools to make property repairs.

If you let a commercial property such as a shop or garage, you may be able to claim ‘plant and machinery’ capital allowances on some items.

Introducing FreeAgent for Landlords

If you’re wondering how to manage your tax obligations as a landlord, then FreeAgent can help.

We’ve built a new version of our award-winning accounting software designed specifically for landlords who earn income from property that’s not owned through a limited company. FreeAgent for Landlords will help unincorporated landlords manage their property finances and submit Self Assessment. Find out more.