How Is Rental Income Taxed in the UK

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 is rental income taxed in the UK 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.

This is one of the most important questions any landlord needs to understand properly and it is also one of the most misunderstood. Many people assume rental income is taxed in a similar way to employment income or that tax is only due if the property is highly profitable. In reality rental income in the UK sits within its own set of rules and recent changes have made the tax position far more complex than it used to be.

Whether you rent out a single former home, a buy to let investment, or a small portfolio, HMRC expects rental income to be declared correctly and taxed in line with current legislation. Getting this wrong can lead to unexpected tax bills, penalties, and a lot of unnecessary stress.

In this article I will explain clearly how rental income is taxed in the UK, how profits are calculated, what expenses you can and cannot deduct, how mortgage interest is treated, and how the tax differs depending on whether you are an individual or a company. I will also highlight common mistakes I see landlords make so you can avoid them.

What Counts as Rental Income?

Rental income is broader than many people realise.

It usually includes:

Rent received from tenants

Payments for utilities if recharged to tenants

Service charges paid by tenants

Rent received for subletting

Income from jointly owned property

Income from overseas rental property

It does not matter whether the income is paid monthly, quarterly, or irregularly. If you receive money in connection with letting property it is usually taxable.

Even if the property makes a loss or only generates a small amount of income it may still need to be reported.

Who Pays Tax on Rental Income?

Tax is paid by the person or people who own the property.

This applies to:

Sole owners

Joint owners

Married couples and civil partners

Limited companies

Each structure has its own tax treatment which I will explain later.

How Rental Profit Is Calculated

HMRC taxes rental income based on profit not on gross rent.

The basic calculation is:

Total rental income

Less allowable expenses

Equals taxable rental profit

That profit is then taxed according to your personal tax position or company structure.

This sounds simple but the complexity lies in deciding what counts as allowable expenses and how certain costs are treated.

Allowable Expenses You Can Deduct

You can usually deduct expenses that are incurred wholly and exclusively for the purpose of renting out the property.

Common allowable expenses include:

Letting agent fees

Repairs and maintenance

Insurance

Council tax and utilities paid by you

Ground rent and service charges

Accountant fees relating to the property

Advertising and tenant find costs

Replacement of domestic items such as white goods

These expenses reduce your taxable rental profit and therefore the amount of tax you pay.

Repairs vs Improvements

One of the most common areas of confusion is the difference between repairs and improvements.

Repairs are usually deductible. Improvements are not.

Repairs include:

Fixing broken items

Replacing items like for like

General maintenance

Improvements include:

Extensions

Significant upgrades

Adding something new that was not there before

Improvement costs are not deducted from rental income. Instead they are usually added to the property’s cost for Capital Gains Tax purposes when the property is sold.

The Property Allowance

If your gross rental income is £1,000 or less in a tax year you may be able to use the property allowance.

This means:

You do not deduct individual expenses

The £1,000 allowance covers the income

You cannot claim both the allowance and actual expenses. For most landlords with letting agent fees or repairs the allowance is not beneficial but it can be useful for very small scale lettings.

Mortgage Interest and Finance Costs

Mortgage interest is the area that has caused the most confusion and frustration for landlords.

You can no longer deduct mortgage interest from rental income to calculate profit.

Instead the system now works as follows:

You calculate rental profit before mortgage interest

You then receive a basic rate tax reduction equal to 20 percent of the mortgage interest

This change has significantly increased taxable profits for many landlords particularly higher and additional rate taxpayers.

The practical effect is that:

Your taxable income appears higher

You may move into a higher tax band

Child benefit and personal allowance can be affected

This rule applies only to individual landlords not to companies.

How the Mortgage Interest Tax Reduction Works

The tax reduction is calculated separately from the rental profit.

It is limited to the lowest of:

Your finance costs

Your rental profits

Your total income above the personal allowance

This means some landlords do not receive the full benefit of the interest they pay.

Understanding this calculation is critical to avoiding surprises.

Cash Basis vs Accruals Basis

Most individual landlords use the cash basis by default.

Under the cash basis:

Income is taxed when received

Expenses are deducted when paid

This keeps things simple and works well for most people.

Some landlords use the accruals basis which matches income and expenses to the period they relate to. This is more complex and usually only necessary in specific situations.

Once a method is chosen you should apply it consistently.

Jointly Owned Property

If a property is owned jointly the rental income and expenses are usually split according to ownership shares.

Each owner reports their share on their own tax return.

For married couples and civil partners the default split is 50 50 unless a formal election is made to reflect actual ownership proportions.

Getting this wrong is a common mistake and can lead to HMRC challenges.

Losses From Rental Property

Rental property can make a loss particularly in early years.

If allowable expenses exceed rental income you have a property loss.

Property losses:

Cannot usually be set against employment income

Are carried forward

Can be set against future rental profits

Losses must still be reported to HMRC to preserve them.

Tax Rates on Rental Income for Individuals

Rental income is taxed as part of your overall income.

The rates that apply depend on your total taxable income.

For individuals rental profits are taxed at:

Basic rate

Higher rate

Additional rate

There is no separate rental income tax rate. It simply stacks on top of your other income.

This is why rental income can push people into higher tax bands even if the property itself does not feel particularly profitable.

National Insurance and Rental Income

Most rental income is not subject to National Insurance.

However if your property activities are extensive and amount to a business HMRC may consider Class 2 National Insurance to apply.

This is relatively rare for standard landlords but can apply in some cases.

How Rental Income Is Taxed in a Limited Company

Rental income is taxed differently when property is held in a company.

In a company:

Rental profit is subject to Corporation Tax

Mortgage interest is fully deductible

No basic rate tax reduction applies

This makes companies more attractive for some landlords particularly higher rate taxpayers with significant borrowing.

However companies introduce other considerations such as:

Dividend tax when extracting profits

Additional admin and costs

The decision to use a company should be made carefully.

Furnished Holiday Lets

Furnished holiday lets are subject to different rules.

They can benefit from:

Different finance cost treatment

Capital allowances on furniture and equipment

However strict conditions must be met and the rules are changing. Specialist advice is often worthwhile here.

Overseas Rental Income

Overseas rental income must still be reported in the UK if you are UK resident.

You may:

Pay tax overseas

Claim double taxation relief in the UK

Overseas property income is reported separately from UK property income.

Reporting Rental Income to HMRC

Rental income is usually reported through the Self Assessment system.

You must:

Register for Self Assessment if required

Complete the property pages

Submit the return by the deadline

Pay any tax due on time

Letting agents do not report income for you. The responsibility always sits with the landlord.

Deadlines You Need to Know

Key deadlines include:

Register by 5 October following the end of the tax year

Submit online tax return by 31 January

Pay tax by 31 January

Missing deadlines can result in penalties even if no tax is ultimately due.

HMRC Scrutiny of Rental Income

HM Revenue & Customs pays close attention to rental income.

HMRC uses data from:

Letting agents

Land Registry

Mortgage providers

If figures do not match expectations HMRC may raise questions. Accurate reporting and good records are essential.

Common Mistakes I See Landlords Make

Over the years I see the same issues repeatedly.

The most common mistakes include:

Not reporting small amounts of rental income

Missing allowable expenses

Incorrect mortgage interest treatment

Incorrect joint ownership splits

Assuming letting agents handle tax reporting

Not planning for payments on account

These mistakes often result in higher tax bills or penalties.

Practical Advice I Give Landlords

When landlords ask me how rental income is taxed I usually give the same advice.

I recommend:

Understand how profit is calculated

Keep records throughout the year

Do not assume tax rules are intuitive

Plan for tax payments early

Get advice before making major decisions

Rental income tax is manageable when understood but costly when assumed.

So How Is Rental Income Taxed in the UK?

In summary rental income in the UK is taxed on the profit you make after allowable expenses. For individual landlords profits are taxed at your marginal Income Tax rate with mortgage interest relief given as a basic rate tax reduction. For companies profits are taxed under Corporation Tax rules with full interest deductibility.

The rules are detailed and the impact can be significant particularly for higher rate taxpayers. Understanding how rental income is taxed allows you to budget properly, avoid surprises, and ensure you are paying the right amount of tax and nothing more.

You may also find our guidance on What records do landlords need to keep for tax and What happens if I forget to declare rental income 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.