A Landlords Guide to Tax on Rental Income

RENTAL ACCOUNTING

When you set yourself up as a landlord with a buy-to-let property you create a new taxable source of income. Essentially, any income from your rental property is taxable just like any other income that you would earn from another monthly source. Rental income is classed as any money that you receive from tenants for any of the following:

• rent
• furniture usage
• cleaning of communal areas
• hot water
• heating or other utilities
• repairs

What Landlord Taxes Do You Need to Pay?

Landlords pay income tax on any rental income. This tax for landlords has many names such as landlord tax, property income tax, buy to let income tax. However, all of these refer to the same thing. At the end of the year, landlords must declare the total net income from all their income sources. Tax on rental income is worked out from the net rental income which is the profit that you make, calculated by adding together all the rental income you receive from various properties and then subtracting any allowable expenses. It’s important to note that as MTD comes into effect all landlords with a gross income (not net) of over £10,000 will be required to submit quarterly tax returns using a digital system. For more information about buy-to-let allowable expenses visit our article here.

What Are The Rental Income Tax Rates?

The landlord tax that you pay is determined by the rate at which you can pay your regular income tax for that year. Often, as a landlord, you will receive income from a variety of sources such as your regular job as well as investments, and your buy to let properties. You need to be meticulous when you calculate your total income if you want to work out exactly how much tax is due. The income tax rates and thresholds for your rental income are the same as those of your personal income. However, be aware adding your net rental income to the other income you receive may push you over your usual tax threshold and into a new entire band.

The Income Tax rates are:

<tbody>
    <tr>
        <td>Personal Allowance</td>	
        <td>Up to £12,500</td>	
        <td>0%</td>
        <td>Up to £12,570</td>	
        <td>0%</td>
    </tr>
    <tr>
        <td>Basic Rate</td>
        <td>£12,501 – £50,000</td>
        <td>20%</td>
        <td>£12,571 – £50,270</td>
        <td>20%</td>
    </tr>  
    <tr>
        <td>Higher Rate</td>
        <td>£50,001 – £150,000</td>
        <td>40%</td>
        <td>£50,271 – £150,000</td>
        <td>40%</td>
    </tr> 
    <tr>
        <td>Additional Rate</td>
        <td>£150,001 and above</td>
        <td>45%</td>
        <td>£150,001 and above</td>
        <td>45%</td>
    </tr>
</tbody>

How Do You Pay The Tax Due On Rental Income?

The HMRC has made the process of declaring and paying tax for your buy to let property reasonably simple and it can all be done online. How exactly you go about it though does depend on the amount of rent you receive.

• Earn less than £1,000 a year in rental income then you don’t have to report it to HMRC
• Earn between £1,000 and £2,500 a year in rental income then you need to contact HMRC
• Earn between £2,500 and £9,999 after allowable expenses or over £10,000 before allowable expenses, then you need to register with HMRC and complete a tax return that includes your rental income, as part of your yearly self-assessment

Buy-to-Let Allowable Expenses And Tax Relief

As we’ve mentioned already, landlords are taxed on the net rental income. The HMRC has strict tax rules on the income from rental property and there are limits as to what you can claim as an allowable expense.

The first thing to bear in mind is you have a £1,000 tax-free property allowance. If you have less than £1,000 in rental income you don’t have to declare. If your rental income amounts to more than £1,000 though you must complete a self-assessment tax return.

You must also choose between receiving the property allowance or deducting the allowable expenses from your rental income. Generally speaking, if the expenses for your rental income equal more than £1,000 you are better off deducting the individual expenses. But if your expenses are lower than £1,000, then you can simply take the full property allowance, and get a slightly larger chunk of tax-free income.

What Qualifies As A Deductible Expense For Rental Income?

There are five main categories of allowable expenses for buy to let property. These include:

• General business expenses, such as your travel costs, including mileage, your phone and broadband marketing and letting agent fees.
• Professional fees, such as your accountant fees, or the cost of surveyors to analyse
• Property service fees, such as cleaning decorating, or gardening costs
• Property charges, such as council tax and utility bills if you the landlord are paying for them.

Whilst many of the costs incurred running your rental property are allowable expenses, not all are some that aren’t include:

• Improvements, as we have just mentioned
• Restoration. This is when you buy a property and restore and restore it into a rentable condition. The cost of restoring it is not allowable, as they are seen as akin to improvements
• Interest payments on financing loans. Under the 2017 section 24 tax changes, you are no longer allowed to claim tax relief on the interest of financing for buying a buy to let property. Instead, you get a tax credit of 20%.

Reducing Buy-to-Let Taxes Through A Limited Company

There are some ways to reduce your tax burden, one of which is by setting your properties up under a limited company. Before doing this make sure to consult with a financial advisor to ensure that this will save you money as setting up a limited company comes with a variety of responsibilities and expenses.

When you set up a limited company for your rental income you no longer pay income tax, instead, you pay corporation tax. The HMRC doesn’t take your personal income into account when determining the rate at which you’ll be charged corporation tax as it’s a fixed rate. Currently, corporation tax stands at 19% for the 2021-2022 tax year and is applied to your overall business earnings rather than the entirety of your income earnings.

There is also a little bit more flexibility with the expenses that you can claim on a limited company by to let since it’s considered a business rather than in that rather than an investment.

How To Track Allowable Expenses And Reduce Tax On Rental Income.

To accurately declare your net rental income for the year you need to have a good system in place to track your income and allowable expenses. Additionally, using a digital system like Landlord Studio will not only allow you to understand your taxes better but to gain a deeper, more nuanced overview of your financials as a whole, allowing you to optimise profitability and cash flow.

Landlords Studio is a property management software designed to help landlords track income and expenses. With it, you can connect your bank accounts and reconcile the income and expenses directly from your bank feed. You can digitise receipts, at the point of sale, and the system will automatically enter the receipt details as an expense for you, as well as allowing you to store the document, alongside that entered expense. Other features include automating tenant communications and instantly generating any of over 15 professional reports.

Landlord Tax Returns

Landlords will be required to file a self-assessment tax return at the end of the year and declare all of their income and claim all of their allowable expenses, the HMRC will then use these figures to determine how much tax you need to pay, and how much National Insurance. You must keep all the receipts and documentation for any claimed expenses or work you’ve had done on a property as the HMRC may request to view it. It’s important to note that this system is changing. And the HMRC will be rolling out making tax digital for all landlords, for the tax year 2023 all landlords, earning above £10,000. You can learn more about Making Tax Digital here.

Other Landlord Tax Considerations

There are several other tax considerations when dealing with your buy to let properties. These include

• Stamp Duty Land Tax. When you purchase a property in the UK valued above a certain amount you will be required to pay stamp duty. UK stamp duty is a one-off cost at the time of purchase and you pay the same stamp duty on a second home as you would on a buy to let investment property.
• Council Tax. As a landlord, you will only pay council tax for your properties when they are vacant. Generally, it is the tenant’s responsibility. You can have a claim council tax as an allowable expense when you complete your self-assessment tax return.
• Capital Gains Tax. This will be due upon the sale of a buy to let property. If you never sell your property, then you won’t have to worry about capital gains tax.