Sumit Agarwal
25 Mar 2025
Business
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Earning rental income as a landlord is a great way to improve your finances, but it also affects your tax bill. You need to know how rental income is taxed and what expenses you can deduct.
The rental property tax deductions you claim can significantly reduce your taxable income, which is essential for lowering your tax burden.
If you don’t report it correctly, you could face unexpected costs or penalties from HMRC. Additionally, understanding the income tax relief on rental income and available tax relief on rental income can help you reduce your overall tax liability.
Rental income is any money you earn from letting out a property. It includes payments from tenants for using your property, whether it’s a house, flat, holiday home, or commercial space.
Monthly rent payments.
Service charges or fees paid by tenants.
Additional payments for furniture, utilities, or maintenance.
Rental income from short-term holiday lets.
Even if the rent is paid in cash, it must be declared to HMRC as taxable income.
Rental income is taxed as part of your total income and is subject to income tax rates based on your earnings.
| Tax Band | Taxable Income Range | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 - £50,270 | 20% |
| Higher Rate | £50,271 - £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
If rental profits exceed your Allowance (£12,570) and you have other income, you’ll pay tax at the applicable rate.
As a landlord, you can deduct certain expenses from your rental income to reduce your taxable profit. These allowable expenses must be wholly and exclusively for renting out your property.
Repairs and maintenance (e.g., plumbing, painting, replacing broken fittings).
Letting agent and property management fees.
Mortgage interest relief (limited to a 20% tax credit).
Council tax, water, and utilities (if paid by the landlord).
Landlord insurance (buildings, contents, liability).
Advertising costs for finding new tenants.
Legal and accountancy fees related to rental income.
These deductions help landlords reduce their taxable rental income, effectively lowering their income tax relief on rental income.
If your rental income exceeds £1,000 per year, you must declare it to HMRC.
If rental profit exceeds £2,500 per year, you must submit a Self-Assessment tax return (SA100 form).
If rental profit is between £1,000 and £2,500, you may be able to report it through HMRC’s online service without filing a full return.
| Filing Method | Deadline |
|---|---|
| Paper Return | 31 October |
| Online Return | 31 January |
Missing deadlines can result in penalties starting from £100 and increasing over time.
Rental income doesn’t just affect your income tax—it also has implications for Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT), and Inheritance Tax (IHT). Understanding these taxes is essential for long-term financial planning.
If you sell a rental property for a profit, you may need to pay Capital Gains Tax (CGT) on the gain (the difference between the selling price and the original purchase price, after deducting allowable costs).
The rental income tax rate applies to any rental property tax deductions that may reduce your overall taxable income, impacting the CGT you owe.
Unlike other assets, residential property gains are taxed at higher rates:
| Tax Band | CGT Rate on Property |
|---|---|
| Basic Rate (income under £50,270) | 18% |
| Higher & Additional Rate (income over £50,270) | 24% |
From April 2024, the annual tax-free CGT allowance is £3,000 (reduced from £6,000 in 2023/24). Any gain above this amount is taxable.
When purchasing buy-to-let properties, landlords must pay Stamp Duty Land Tax (SDLT), including an additional 3% surcharge on top of standard rates.
| Property Price | Standard SDLT Rate | Buy-to-Let SDLT Rate (Extra 3%) |
|---|---|---|
| Up to £250,000 | 0% | 3% |
| £250,001 - £925,000 | 5% | 8% |
| £925,001 - £1.5 million | 10% | 13% |
| Over £1.5 million | 12% | 15% |
Rental properties form part of your estate for Inheritance Tax (IHT), which is charged at 40% on estates above £325,000 (the nil-rate band).
If your total estate (including property, savings, and investments) exceeds £325,000, IHT is charged at 40%.
If you pass a main residence to direct descendants (children or grandchildren), the threshold increases to £500,000 (including the £175,000 residence nil-rate band).
Rental properties do not qualify for the residence nil-rate band, meaning they are fully taxable if your estate exceeds the threshold.
Failing to report rental income can result in HMRC investigations and significant penalties.
| Offence | Penalty |
|---|---|
| Late tax return | £100 minimum |
| Underreported income (careless) | Up to 30% of unpaid tax |
| Deliberate tax evasion | Up to 100% of unpaid tax |
Claim all allowable expenses to reduce taxable income.
Offset losses across multiple properties to lower your tax bill.
Take advantage of the Marriage Allowance to transfer unused tax-free allowances.
Consider using a limited company for tax advantages.
Make use of the annual CGT exemption to reduce tax on property sales.
Gift properties to family members to reduce Inheritance Tax liability.
Keep detailed records for accurate reporting and deductions.
Use a property tax accountant for expert tax planning.
Consider tax relief for energy-efficient property improvements.
Take advantage of property-specific tax reliefs, like those for furnished holiday lets.
Rental income affects your property tax returns in several ways, from income tax obligations to potential Capital Gains Tax when selling. You may also be eligible for income tax relief on rental income for certain expenses.
As a landlord, managing rental income and taxes can be complex. dns accountants offer expert services to help you navigate the intricacies of rental income tax, allowable deductions, and compliance with HMRC Contact us today at 033 0088 3616, email contact@dnsaccountants.co.uk, or book a free consultationto discuss your financial needs. With our support, you can ensure accurate reporting, reduce tax liabilities, and maximise your rental profits
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