How Is Rental Income Taxed for Landlords?

Like most profit-generating business ventures, landlords must pay a tax on the profit they make from renting a home. If you are renting a home while in full-time employment, it's likely that you will only have to pay income tax on your profits. This is because your National Insurance will be covered by your full-time employment. However, if you are a landlord by profession, you will have to notify HMRC that you run a business and will be taxed accordingly.

Knowing what you owe in tax as a landlord is not always straightforward. To demystify this process for you, we have created a guide to help readers answer the question 'how is rental income taxed for landlords?'

How Much Tax Do You Pay on Rental Income as a Landlord?

The personal tax allowance for the year covering 2020/2021 is set at £12,500. Depending on how much you earn and what tax band that places you in, you will have to pay a tax on any profits above the personal allowance amount.

Working Out Your Taxable Profits

You can work out the profit you have generated by adding together your various rental incomes and deducting expenses. Rental income includes any incoming streams of revenue. For example, the rent you are paid, any money you receive to cover utilities, communal cleaning, parking and any other fees that you charge your tenants.

As a landlord, you are entitled to deductions on your taxes for a range of 'allowable expenses'. These expenses include costs like repairs and maintenance, landlord insurance, management and accountancy fees, legal fees and the wages of any help you have hired. You cannot claim for personal expenses, home improvements or private phone calls. Only ever claim for expenses that are directly related to the cost of the property you are renting out and that you have paid for in full exclusively. If your tenants pay for utility bills, you cannot claim this back as an expense, but you could do if you paid for this in place of your tenants.

So, to find out the answer to the question of 'how much tax do you pay on rental income as a landlord?', you will need to calculate the difference between your rental income and allowed expenses. Make sure that you keep copies of all of your receipts for proof. You will then have to pay tax on the profit amount you arrive at depending on your band.

For example, if you earnt £70,000 profit on your properties in the tax year, this would place you in the 'Higher Rate Tax Band' (above £50,001 earnings) and would mean you must pay 40% tax on the remaining £57,500 above your £12,500 personal allowance.

It's worth noting that you can lump your earnings and expenses together for multiple properties to create one comprehensive taxable income amount.

When reporting on your rental income, you must declare it before the deadline after the end of the tax year which always finishes on the 5th April. The deadline for online tax returns is the 31st Jan following the end of the tax year you are declaring for.

Other Tax Considerations for Landlords

If you own a property which is currently empty, then you must pay the council tax due for the property in place of your tenants. You should also pay for any utility bills for the property while it is empty. However, as discussed before, you can claim this amount back as part of your allowed expenses.

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