How rental income is taxed
You pay income tax on the profit from your property, not on the rent you collect. Profit is your rental income less your allowable costs. That profit is added to your other income and taxed at your usual rates, after your personal allowance of £12,570.
Most landlords report rental profit through Self Assessment. If your property is held jointly, each owner reports their share. The starting point is always the same, which is rent received less the genuine costs of running the let. Our main landlord tax guide gives the wider picture of what landlords need to file and when.
Allowable costs and the property allowance
You can deduct the running costs of letting from your rental income. Allowable costs typically include letting agent fees, insurance, repairs and maintenance, ground rent and service charges, and the costs of finding tenants.
An important distinction is between repairs and improvements. Repairs that put the property back into its original condition, such as fixing a boiler or repainting, are allowable against your rental income. Improvements that add something new or upgrade the property to a better standard are capital, not running costs, and instead reduce a future capital gain rather than your rental profit.
There is also a property allowance of £1,000. If your rental income is £1,000 or less in a tax year, it is usually covered by this allowance with nothing to report. If your income is higher, you can either claim the £1,000 allowance instead of your actual costs, or deduct your real costs, whichever is better. Our detailed guide to landlord allowable expenses sets out exactly what you can claim.
The mortgage interest reducer
Mortgage interest is no longer deducted from rental income in the way it once was. Instead, landlords now receive a basic rate tax reduction. You get a tax reduction worth 20% of your finance costs, such as mortgage interest, set against your tax bill rather than against your rental profit.
For a basic rate taxpayer the effect is broadly similar to the old system. For higher rate taxpayers it usually means a larger bill than before, because the relief is capped at 20% even though they pay tax at a higher rate on the rental profit itself. This is one of the biggest reasons higher earning landlords should review how their lettings are structured.
A worked example
A landlord with rent and costs
James lets a flat and receives £14,400 of rent over the year. His allowable running costs are letting agent fees of £1,440, insurance of £300, and repairs of £860, totalling £2,600. His rental profit before finance costs is therefore £11,800. He also pays £4,000 of mortgage interest. Rather than deducting that interest from his profit, he receives a tax reduction of 20% of £4,000, which is £800, taken off his final tax bill. His taxable rental profit stays at £11,800, and the £800 reducer lowers the tax due on it.
Joint ownership
Where a property is owned jointly, the rental profit is normally split between the owners and each reports their share on their own tax return. For married couples and civil partners who own property jointly, the income is usually treated as split equally by default, though it can sometimes be matched to actual ownership shares where the right steps are taken.
This matters because spreading income across two people can use two personal allowances and keep more of the profit in lower tax bands. The right approach depends on your circumstances and ownership, so it is worth taking advice before assuming a particular split applies.
Capital gains when you sell
Income tax covers the rent while you let the property. When you sell a residential property that is not your main home, any gain may be subject to Capital Gains Tax. Importantly, a residential property gain must be reported and the tax paid within 60 days of completion, which is a much tighter deadline than the normal tax return.
The improvements you treated as capital rather than repairs can reduce that gain, which is another reason to keep clear records throughout. Our guide to Capital Gains Tax on property explains the reporting and the reliefs in full.
What you should do
Keep a clear record of rent received and every running cost, and separate repairs from improvements as you go. Remember that mortgage interest gives a 20% reduction rather than a deduction, and if you own jointly, make sure the split is set up correctly. Higher rate landlords in particular should review their structure.
To get your rental profit worked out correctly and your return filed on time, start your quote and we will take it from there.
How your rental profit is taxed, which costs you can claim, how the mortgage interest reducer works and what happens with joint ownership.