How Do I Calculate My Rental Income Profit

Calculating rental income profit sounds simple although the rules are far more detailed than most landlords expect. You cannot just subtract mortgage payments from rent and assume the remainder is your taxable profit. HMRC has strict rules about which expenses you can deduct, how mortgage interest relief works, how to handle joint ownership, how to deal with furnished lets and what to do when a tenant leaves early or pays late. In my opinion rental profit is one of the areas where landlords make the most mistakes because the calculations seem straightforward yet the legislation is precise.

This guide explains exactly how to calculate your rental income profit. You will learn which income counts, which expenses you can deduct, the effect of Section 24 mortgage interest restrictions, how losses are treated, how to manage joint ownership, how to keep proper records and how to handle real world situations such as rent arrears or repairs. I will also include clear examples because nothing makes rental calculations easier than seeing the numbers applied in practice.

By the end you will know exactly how to calculate your rental income profit for both financial planning and HMRC reporting.

The Basic Formula for Rental Profit

The core calculation is:

Rental profit = taxable rental income minus allowable expenses

Taxable rental income includes:

• Rent received

• Payments for the use of furniture

• Income from licences

• Payments for services provided to the tenant

• Charges passed on to the tenant

• Non refundable deposits

Allowable expenses include:

• Repairs

• Insurance

• Letting fees

• Replacement of certain domestic items

• Council tax you pay

• Utilities you pay

• Maintenance costs

Mortgage interest is handled differently, which I explain later.

In my opinion every landlord should memorise this formula because it is the starting point for everything else.

Step 1: Identify All Rental Income

You must include all income related to the property, not just monthly rent.

Rental income includes:

• Regular rent payments

• Rent paid in advance

• Backdated or late rent

• Fees paid by tenants

• Service charges you pass on

• Income for use of furniture

• Payments for gardening or cleaning if included in rent

• Non refundable deposits

• Surrender payments (payments a tenant gives you to end a tenancy early)

You must also include:

• Insurance policy payouts that replace rental income

• Guaranteed rent scheme income

• Licensing income from lodgers or short term lets

Income does not include:

• Refundable deposits

• Deposits returned to tenants

• Money that belongs to tenants such as their share of bills

Step 2: Identify All Allowable Expenses

HMRC allows landlords to deduct only certain expenses.

Allowable expenses include:

• Repairs to the property

• Repainting and redecorating after damage

• Replacing broken windows or doors

• Fixing boilers and plumbing

• Property management fees

• Letting agent fees

• Accountancy fees for rental accounts

• Buildings and contents insurance

• Electricity, gas and water if paid by you

• Council tax if you pay it

• Ground rent and service charges

• Advertising for new tenants

• Travel to and from the rental property

• Phone calls, postage and stationery for rental management

• Replacement of domestic items (under the replacement of domestic items relief)

You cannot deduct:

• Capital improvements

• Mortgage capital repayments

• Personal expenses

• Your own time or labour

• Renovations that increase the property’s value

• Extensions or conversions

• The original cost of furniture (only replacements qualify)

In my opinion many landlords wrongly claim improvements as repairs which HMRC can challenge.

Step 3: Understand the Mortgage Interest Rules

Mortgage interest is no longer deducted directly from rental income. Instead you receive a 20 percent tax credit.

This means:

• You cannot deduct mortgage interest as an expense

• Instead you reduce your final tax bill by 20 percent of the interest

Mortgage interest includes:

• Interest on loans used to buy the rental

• Interest on loans used to improve the rental

• Interest on loans secured against other property used for the rental

You cannot claim:

• Mortgage capital repayments

• Arrangement fees (these may fall under finance costs but not always as deductible)

• Early repayment penalties

Example of the mortgage credit

Mortgage interest paid: £6,000
Tax credit: 20 percent of £6,000 = £1,200
This reduces your tax bill, not your rental profit.

In my opinion this rule has been the biggest tax change for landlords in decades because it pushes many into the higher rate band.

Step 4: Apply the Replacement of Domestic Items Relief

You cannot claim the cost of new furniture when you start letting the property.

You can only claim replacement costs for items such as:

• Sofas

• Beds

• Mattresses

• Curtains

• Carpets

• White goods

• Kitchenware

The replacement must be:

• A like for like replacement

• Not substantially better than the original

If you upgrade, you can only deduct the cost of the cheaper equivalent.

Step 5: Include All Legitimate Repairs

Repairs are fully deductible, improvements are not.

Repairs include:

• Fixing existing damage

• Replacing like for like components

• Repainting in the same style

• Replacing old carpets with similar carpets

• Boiler repairs

Improvements include:

• Loft conversions

• New extensions

• Upgraded kitchens

• Rewiring to a higher standard

Improvements are added to your Capital Gains Tax base cost when you eventually sell the property.

Step 6: Deal With Periods When the Property Is Empty

If the property is empty between tenants, you can still claim:

• Council tax

• Utilities you pay

• Insurance

• Repairs

• Letting agent fees

You cannot claim:

• Loss of rent

• Income you never received

Step 7: Calculate Your Rental Profit

Once you have total income and allowable expenses, calculate your profit.

Example

Income:

• Rent received: £12,000

• Surrender fee: £500
  Total income = £12,500

Expenses:

• Repairs: £1,200

• Insurance: £300

• Letting agent fees: £1,500

• Travel: £200

• Service charges: £1,000
  Total expenses = £4,200

Mortgage interest:

• Interest paid = £5,000

• Tax credit = £1,000

Taxable rental profit:

£12,500 minus £4,200 = £8,300

You then receive a £1,000 tax credit against your final tax bill.

Step 8: Handle Joint Ownership Correctly

If the property is jointly owned each owner must declare their share.

Ownership can be:

• 50 percent each for joint tenants

• Any agreed percentage for tenants in common

For married couples or civil partners:

• Income is split 50/50 unless a Form 17 is filed

• A Form 17 allows you to split rental profit according to actual ownership

In my opinion many couples miss tax saving opportunities because they do not file a Form 17 when ownership is unequal.

Step 9: Understand When a Loss Carries Forward

If your expenses exceed your income you may make a rental loss.

Rental losses:

• Cannot be offset against salary

• Cannot be offset against dividends

• Must be carried forward

• Can be used against future rental profits

Losses belong to each individual owner based on their share.

Step 10: Record Keeping

HMRC requires landlords to keep detailed records including:

• Rent received

• Bank statements

• Invoices

• Receipts

• Mortgage statements

• Contracts

• Tenancy agreements

• Travel records

• Repair invoices

• Accountant’s records

You must keep records for at least:

• 5 years after the 31 January filing deadline

In my opinion good records are the only defence if HMRC challenges your figures.

Real World Examples

Example 1: Standard rental calculation

• Rent: £15,000

• Expenses: £4,000

• Mortgage interest: £6,000

• Rental profit: £11,000

• Tax credit: £1,200

Tax is calculated on £11,000 but reduced by £1,200.

Example 2: Loss situation

• Rent: £10,000

• Expenses: £12,000

Rental loss = £2,000
Carried forward until a future profit arises.

Example 3: Joint owners with unequal shares

• Ownership 80/20

• Rent: £12,000

• Expenses: £3,000

If Form 17 is filed:

• Owner A reports 80 percent of profit

• Owner B reports 20 percent

If no Form 17:

• Both report 50 percent regardless of ownership.

Common Mistakes Landlords Make

• Deducting mortgage capital repayments

• Treating improvements as repairs

• Forgetting to declare tenant fees

• Not using Form 17 correctly

• Claiming furniture incorrectly

• Mixing personal and rental expenses

• Not claiming mileage

• Forgetting to claim mortgage tax credit

• Not keeping receipts

• Believing losses reduce income tax

In my opinion the biggest mistake is treating the mortgage as a simple deductible cost. Section 24 has changed that entirely.

Conclusion

Calculating your rental income profit requires more than subtracting mortgage payments from rent. You must include all sources of rental income, deduct only allowable expenses and then apply the mortgage interest tax credit. Repairs are deductible, improvements are not and replacement of domestic items follows specific rules. If you jointly own the property you must split profits correctly and record everything thoroughly. With the correct method you can calculate your rental profit accurately, avoid HMRC penalties and understand how your rental property truly performs financially.

In my opinion landlords who follow these steps gain a clear picture of their tax position and avoid the common pitfalls that cause stress during Self Assessment.