Tax on rental income: what landlords need to know
In this article, we explain when you’ll need to pay tax and National Insurance on the income you earn from letting property as a landlord.
Paying tax on rental income
You’re not required to pay tax on the first £1,000 of income you make from property rental during a tax year. This amount is known as the property income allowance or ‘the property allowance’.
If your gross property income (your rental income before you make any deductions for allowable expenses) during a tax year is between £1,000 and £2,500, you should contact HMRC to find out if you need to declare it.
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 certain costs from your gross property income.
If your property income is greater than £2,500 and you haven’t done so in previous tax years, you’ll need to register for Self Assessment. Your deadline for doing this is the 5th October that follows the end of the tax year during which you earned the income. For example, if you need to declare property income for the 2021/22 tax year - which ended on 5th April 2022 - you’ll need to register for Self Assessment by 5th October 2022.
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.
If you make income from letting out a residential property, you must pay tax on the net profit you make (i.e. the profit you make after deductions for ‘allowable expenses’ have been applied).
Allowable expenses are costs that you incur in the day-to-day running of the rental property. You can find out more about allowable expenses for landlords in our dedicated guide and use our interactive tool for landlords to find out how much you can deduct from your property income when you calculate your taxable profit.
Furnished holiday lets
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. 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.
In some circumstances, you may also be eligible to claim certain Capital Gains Tax reliefs for letting a furnished holiday home. The government provides more information about tax relief for furnished holiday lets on its website.
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. You can find more information about capital allowances on the government’s website.
Income from property you own through a limited company
If you make income from a property that you own through a limited company, this income is subject to Corporation Tax and should be counted the same way as any other business income.
Paying National Insurance as a landlord
If your rental property is not owned through a limited company and your net property income is £6,725 a year or more during a tax year, you have to pay Class 2 National Insurance if HMRC also deems that you are running a business. Factors that are likely to be taken 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 National Insurance. However, you can still choose to make voluntary Class 2 National Insurance payments for the year to help ensure you get the full State Pension.
If you’re in any doubt about whether you’re running a business by letting properties, or about any of the information covered in this blog post, be sure to check with HMRC or your accountant before taking any action.
How to manage tax as a landlord
If you’re wondering how to manage your tax obligations as a landlord, then FreeAgent can help. We’re building a brand 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. Available from early 2023, FreeAgent for Landlords will help unincorporated landlords prepare for the introduction of Making Tax Digital (MTD) for Income Tax, which will affect many individuals who earn income from property.
You can find out more about FreeAgent for Landlords and sign up to register your interest to be the first to know when it’s ready. Alternatively, you can speak to your accountant about early access.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.