How do I pay tax on Airbnb or holiday lets?

At Towerstone Accountants we provide specialist property accountant services for landlords property investors and individuals dealing with property tax and reporting obligations across the UK. This article has been written to explain How do I pay tax on Airbnb or holiday lets in clear practical terms so you understand how the rules apply in real situations. Our aim is to help you make informed decisions avoid costly mistakes and know when professional advice is worthwhile.

As a chartered accountant running my own firm, I am asked about Airbnb and holiday let tax almost daily. Many people start hosting casually, perhaps letting out a spare room or a second property, and only later realise that the tax rules are more complex than expected. Others deliberately invest in short term lets because of the higher income potential, but are unclear how that income should be taxed, what expenses are allowed, and whether the rules differ from standard buy to let property.

The reality is that income from Airbnb and holiday lets is fully taxable, but the way it is taxed depends on how the property is used, whether it qualifies as a furnished holiday let, and how much income you generate. In this article, I want to explain clearly and practically how you pay tax on Airbnb or holiday lets in the UK, covering income tax, allowable expenses, National Insurance, VAT, reporting obligations, and the most common mistakes I see HMRC challenge.

This is written exactly how I explain it to clients, in plain UK English, based on real HMRC guidance and real world experience.

The starting point, Airbnb income is taxable

The first thing to be absolutely clear about is this.

If you earn money from Airbnb or holiday letting, that income is taxable.

It does not matter whether:

• You only let the property occasionally

• The income is paid into a personal account

• You do it as a side hustle

• You did not make a profit

• Airbnb have not issued you a tax statement yet

If money comes in from short term letting, HMRC expect it to be declared.

Airbnb versus holiday lets, what is the difference

People often use these terms interchangeably, but for tax purposes, there is an important distinction.

Airbnb income can fall into one of three broad categories:

• Rent a Room income from your own home

• Furnished Holiday Let income

• Ordinary property income from short term lets

Each is taxed differently.

Understanding which category you fall into is the foundation of getting your tax right.

Renting out a room in your own home, Rent a Room relief

If you rent out a room in your main home on Airbnb, you may qualify for Rent a Room relief.

This applies where:

• The property is your main residence

• You let out furnished accommodation

• You live in the property at the same time as the guests

Under Rent a Room relief, you can earn up to a threshold each tax year before paying any tax on that income.

If your Airbnb income is below the threshold:

• You do not pay income tax on it

• You may not need to declare it at all

If it exceeds the threshold, you can choose between:

• Paying tax on the excess over the threshold

• Opting out of the scheme and deducting actual expenses instead

This relief is very helpful for people letting out spare rooms, but it does not apply to whole properties that are not your home.

Airbnb income from a whole property you do not live in

If you let out an entire property on Airbnb and you do not live there, Rent a Room relief does not apply.

In this case, the income is treated as property income or potentially as furnished holiday let income, depending on the facts.

This is where the tax position becomes more complex.

What is a Furnished Holiday Let for tax purposes

A Furnished Holiday Let, often shortened to FHL, is a specific tax category with its own rules and benefits.

A property can qualify as a furnished holiday let if all of the following conditions are met:

• It is located in the UK or the EEA

• It is furnished sufficiently for normal occupation

• It is let on a short term basis

• It is available for letting to the public for a minimum number of days per year

• It is actually let for a minimum number of days per year

• Longer term lets do not exceed certain limits

These tests are strict and HMRC do check them.

Why Furnished Holiday Let status matters

FHL status is important because it offers tax advantages that ordinary rental property does not.

These can include:

• Capital allowances on furniture and equipment

• More favourable Capital Gains Tax reliefs in some cases

• Profits counting as relevant earnings for pension contributions

• Different treatment for certain losses

However, these benefits only apply if the property genuinely qualifies.

Airbnb properties that do not qualify as FHLs

If your Airbnb or holiday let does not meet the FHL conditions, it is taxed as ordinary property income.

This is the same tax regime as buy to let property, even if the stays are short term.

Many Airbnb hosts assume they automatically qualify as FHLs. In practice, many do not.

How income tax works on Airbnb and holiday let income

Regardless of category, the basic principle is the same.

You are taxed on your profit, not your gross income.

Profit is calculated as:

Rental income
minus
Allowable expenses

equals
Taxable profit

This profit is then taxed at your marginal income tax rate.

Allowable expenses for Airbnb and holiday lets

One of the biggest advantages of Airbnb and holiday lets is the range of allowable expenses.

Common allowable expenses include:

• Cleaning costs

• Laundry and linen

• Utilities

• Council tax or business rates

• Insurance

• Repairs and maintenance

• Replacement of furniture and furnishings

• Airbnb service fees

• Letting agent fees

• Advertising costs

• Accountancy fees

• Internet and TV services

• Consumables for guests

These expenses must be incurred wholly and exclusively for the letting business.

Mortgage interest and finance costs

Mortgage interest is treated differently depending on the type of let.

For ordinary property income:

• Mortgage interest is no longer deducted from profit

• Instead, a basic rate tax credit is given

For Furnished Holiday Lets:

• Mortgage interest can usually be deducted in full when calculating profit

This difference alone can significantly affect tax bills.

Capital allowances for Furnished Holiday Lets

One major benefit of FHL status is the ability to claim capital allowances.

This allows you to deduct the cost of certain items against profit, such as:

• Furniture

• Beds and sofas

• White goods

• Carpets and flooring

• Fixtures and fittings

These costs are spread through allowances rather than deducted all at once.

Ordinary buy to let properties do not qualify for these allowances.

Replacement of Domestic Items relief

If your Airbnb does not qualify as an FHL, you may still be able to claim Replacement of Domestic Items relief.

This allows a deduction for replacing items such as:

• Beds

• Sofas

• Tables and chairs

• White goods

The relief applies to replacements, not the original purchase.

National Insurance and Airbnb income

This is an area of confusion.

Most Airbnb and holiday let income is subject to income tax but not Class 2 or Class 4 National Insurance.

However, if the level of activity is high enough, HMRC may view it as a trading business rather than passive property income.

This is rare but possible where:

• Services are provided extensively

• There is significant guest interaction

• The operation resembles a hotel or guesthouse

In such cases, National Insurance may apply.

VAT and Airbnb or holiday lets

VAT is often overlooked by Airbnb hosts.

If your total taxable turnover from Airbnb and other activities exceeds the VAT registration threshold, you may need to register for VAT.

Important points include:

• Short term accommodation is generally standard rated for VAT

• Airbnb service fees include VAT, but that VAT is not yours to reclaim unless registered

• Once registered, you may need to charge VAT on guest stays

This can have a major impact on pricing and profitability.

Business rates versus council tax

Some holiday lets are subject to business rates rather than council tax.

This depends on:

• The number of days the property is available to let

• The number of days it is actually let

If business rates apply, small business rate relief may reduce or eliminate the charge.

This is separate from income tax, but it affects overall profitability.

How to report Airbnb income to HMRC

Most people report Airbnb or holiday let income through Self Assessment.

This involves:

• Registering for Self Assessment if not already registered

• Completing the property income pages

• Declaring income and expenses

• Submitting the return by the deadline

• Paying tax due by the payment deadline

Even if Airbnb have already shared data with HMRC, you are still responsible for accurate reporting.

Deadlines you need to be aware of

Key deadlines include:

• Registering for Self Assessment by the relevant deadline

• Filing your tax return by the filing deadline

• Paying income tax by the payment deadline

• Making payments on account where required

Missing deadlines leads to automatic penalties and interest.

Payments on account and cash flow planning

If your tax bill exceeds a certain level, HMRC may require payments on account.

This means:

• Paying tax in advance towards the next year

• Two payments each year

• Potential cash flow pressure for new hosts

Understanding this early helps avoid shocks.

Joint ownership and Airbnb income

If the property is jointly owned, income is usually split according to ownership.

For married couples living together, HMRC often assume a 50 50 split unless a different beneficial ownership is declared.

Getting this wrong can lead to enquiries and backdated tax.

Common mistakes Airbnb hosts make

In practice, the same issues come up repeatedly.

These include:

• Not declaring Airbnb income at all

• Assuming small amounts do not matter

• Confusing Rent a Room relief with FHL rules

• Claiming expenses incorrectly

• Missing VAT obligations

• Not keeping proper records

• Relying on Airbnb summaries without checking them

• Ignoring payments on account

Most of these mistakes are avoidable with early advice.

Record keeping for Airbnb and holiday lets

Good records are essential.

You should keep:

• Airbnb income reports

• Bank statements

• Receipts for expenses

• Invoices for larger costs

• Mortgage statements

• Utility bills

• Mileage logs if relevant

Records should be kept for several years and be easily accessible.

HMRC enquiries into Airbnb income

HMRC now receive data from platforms like Airbnb.

This means:

• Undeclared income is easier to identify

• HMRC property enquiries are increasing

• Backdated tax and penalties are common

Voluntary disclosure is usually far better than waiting for HMRC to make contact.

What if you have not declared Airbnb income in the past

If you realise you have undeclared Airbnb income, the best approach is to act early.

This usually involves:

• Calculating the income properly

• Identifying allowable expenses

• Making a voluntary disclosure to HMRC

• Paying tax due

• Reducing penalties through cooperation

Ignoring the issue rarely ends well.

Planning opportunities for Airbnb and holiday lets

With the right structure, Airbnb and holiday let income can be tax efficient.

Planning may include:

• Assessing whether FHL status is achievable

• Reviewing ownership structure

• Using allowances effectively

• Timing expenses and improvements

• Managing income levels

• Considering VAT registration carefully

Planning must always be based on genuine commercial reality.

When professional advice is strongly recommended

In my professional opinion, advice is essential where:

• Income is significant

• Multiple properties are involved

• FHL status is borderline

• VAT registration is a possibility

• Past income has not been declared

• Joint ownership is complex

The cost of advice is usually far lower than the cost of mistakes.

Final thoughts from real world experience

So, how do you pay tax on Airbnb or holiday lets. You pay tax in the same way as any other income, by declaring your profits to HMRC and paying the tax due. What makes Airbnb different is the range of rules that can apply depending on how and where you let, and whether the property qualifies for special treatment.

In my experience, the biggest problems arise not from high tax rates, but from misunderstanding the rules or leaving things too late. Airbnb income feels informal, but HMRC do not treat it that way.

Airbnb and holiday let tax is manageable and often efficient when done properly. But it needs to be taken seriously from the start, with good records, clear understanding, and the right advice when things become more complex.

You may also find our guidance on How do I claim capital allowances on a furnished holiday let and How do I report property income to HMRC useful when exploring related property tax questions. For a broader overview of property tax reporting and planning topics you can visit our property hub which brings all related guidance together.