What happens if I forget to declare rental income?

Forgetting to declare rental income is a common mistake, especially for first-time landlords or those renting out property informally. Many assume that small amounts of rent or shared accommodation income do not need to be reported, but HMRC expects all rental earnings above certain limits to be declared.

Failing to declare this income can lead to backdated tax bills, penalties, and interest charges. However, if you realise the mistake and take action quickly, HMRC will usually work with you to correct it and may reduce the penalties.

This article explains what happens if you forget to declare rental income, how HMRC finds out, and what you can do to fix it.

When rental income must be declared

Anyone who earns income from letting out a property, room, or even part of their home must declare it to HMRC unless it falls under specific exemptions. These include:

• The Rent a Room Scheme, which allows you to earn up to £7,500 a year tax-free by renting out furnished accommodation in your home.

• The property allowance, which lets you earn up to £1,000 a year from property income without paying tax or completing a tax return.

If your rental income exceeds these limits, you must declare it through a Self Assessment tax return. This applies whether you rent out a house, flat, holiday let, garage, or commercial space. Even if your expenses mean you made little or no profit, you are still required to report the income.

What happens if you forget to declare rental income

If you forget to declare rental income, HMRC will treat it as underpaid tax. The next steps depend on whether the omission was accidental, careless, or deliberate.

HMRC can go back several years to collect unpaid tax and may also charge penalties and interest. The length of time they can investigate depends on your behaviour:

• Up to 4 years for genuine mistakes.

• Up to 6 years for carelessness.

• Up to 20 years for deliberate evasion.

If HMRC believes the omission was intentional, they can open a formal investigation, issue higher penalties, and in rare cases pursue criminal charges. However, in most situations, forgotten rental income is treated as an oversight, and penalties are reduced if you disclose it voluntarily.

How HMRC finds out about undeclared rental income

HMRC has multiple ways of identifying undeclared rental income. Their Connect system analyses data from banks, letting agents, online platforms, and the Land Registry to identify inconsistencies between property ownership and reported income.

Common ways HMRC discovers rental income include:

• Information shared by letting agents or online booking platforms.

• Cross-checking mortgage applications showing rental income.

• Data from local councils, estate agents, and energy suppliers.

• Tenant complaints or deposit scheme information.

• Random compliance checks.

In recent years, HMRC has increased its use of digital data matching, meaning it is now much easier for them to identify landlords who have not declared their rental income.

Correcting undeclared rental income voluntarily

If you realise you have forgotten to declare rental income, the best approach is to come forward voluntarily using HMRC’s Let Property Campaign.

The Let Property Campaign is a disclosure scheme that allows landlords to bring their tax affairs up to date and settle any unpaid tax with reduced penalties. It applies to all residential landlords, including those who:

• Let out single properties.

• Have multiple buy-to-let homes.

• Rent rooms in their main home.

• Let holiday accommodation.

• Rent property abroad.

To use the campaign, you must:

1. Inform HMRC that you wish to make a disclosure.

2. Calculate how much rental income you did not declare and the tax owed.

3. Submit your disclosure and pay the tax, interest, and any penalty due.

Once the disclosure is complete, HMRC will review it and, in most cases, accept it without further investigation, provided you have been honest and accurate.

How penalties are calculated

HMRC’s penalties for undeclared rental income depend on the reason for the error and whether you voluntarily disclosed it.

If you come forward before HMRC contacts you, penalties are usually much lower. The penalty percentage is based on three factors:

• Behaviour whether the omission was careless or deliberate.

• Disclosure type whether you told HMRC or they found it first.

• Cooperation how quickly and fully you provide information.

Typical penalty ranges are:

• 0% to 30% of unpaid tax for careless mistakes voluntarily disclosed.

• 20% to 70% for deliberate errors disclosed voluntarily.

• 30% to 100% if HMRC discovers the issue first.

In addition to penalties, you will pay interest on the unpaid tax from the date it should have been paid.

Example of how undeclared income is treated

Suppose you started renting out a flat in 2020 for £800 per month and forgot to include the income on your tax return. After deducting £2,000 in expenses per year, your taxable rental profit is £7,600 annually.

If you declare this voluntarily in 2025, you will owe tax for each missed year, plus interest and a small penalty. Because you came forward voluntarily, HMRC is likely to apply the lowest penalty rate.

If HMRC discovers it first, you could face higher penalties and scrutiny over your other income sources.

What to do if HMRC contacts you first

If HMRC writes to you about undeclared rental income, it means they already have information suggesting you are receiving rent. It is important to respond promptly and cooperatively.

You can still use the Let Property Campaign, but you will not receive the same penalty reductions as if you had disclosed the issue before contact. Provide full details and supporting documents such as tenancy agreements, bank statements, and receipts.

Delaying or ignoring HMRC correspondence can lead to higher penalties or formal investigations.

How to calculate and pay tax on rental income

Once you have declared your rental income, you must calculate your taxable profit. This is your total rental income minus allowable expenses, which can include:

• Letting agent and management fees.

• Repairs and maintenance costs.

• Insurance premiums.

• Council tax, utilities, and service charges (if paid by you).

• Accountant or professional fees.

• Mortgage interest (restricted for individual landlords).

You then pay Income Tax on the profit based on your personal tax rate:

• 20% for basic rate taxpayers.

• 40% for higher rate taxpayers.

• 45% for additional rate taxpayers.

If you operate through a limited company, rental profits are subject to Corporation Tax instead.

Keeping proper records going forward

To avoid future issues, it is essential to maintain clear and accurate records of your property income and expenses. HMRC requires landlords to keep these for at least five years after the tax year ends.

Good record keeping includes:

• Rent invoices and tenancy agreements.

• Bank statements showing rent received.

• Receipts for maintenance and repairs.

• Insurance and utility bills.

• Mortgage interest statements.

Using accounting software or a property management app can make this process much easier and reduce the risk of missing anything.

Professional help for landlords

If you are unsure how to disclose undeclared income or calculate what you owe, seek professional advice. A property accountant can help you:

• Estimate unpaid tax accurately.

• Prepare and submit your disclosure.

• Negotiate penalties with HMRC.

• Set up proper accounting systems for future compliance.

Working with a professional can also give you peace of mind that your disclosure will be accepted and that you won’t face unexpected tax bills later.

The bottom line

Forgetting to declare rental income is not uncommon, but it’s important to deal with it promptly. HMRC takes undeclared rental income seriously, but those who come forward voluntarily usually receive fair treatment and reduced penalties.

If you realise you’ve missed reporting rental income, act quickly, calculate what you owe, and disclose it through the Let Property Campaign. With the right approach, you can correct past mistakes, avoid serious penalties, and keep your property tax affairs fully compliant in future years.