If you’re a landlord, you’ll have to pay tax on rental income from any property that you are letting. Sounds simple, right?
If this is the case for you, there are a few things you need to be aware of. Read on to find out more.
Calculating income tax on rental properties
First, we’ll look at how to calculate income tax.
Normally, as a landlord, you will pay income tax on any profit you receive from rental properties that you own.
Put simply, your profit is the sum left once you’ve added together your rental income and deducted any expenses or allowances.
If you have a mortgage on the property that you are letting, you can include some of the mortgage interest you incur as an expense.
What counts as rental income for landlords?
Your income is primarily the rent you receive, but it also includes any other payments from tenants for services normally provided by a landlord.
- Cleaning of communal areas
- Utility bills – including hot water, heating and broadband
- Arranging repairs to the property
- If you charge any non-refundable deposits for your property, these will also count as rental income, as will money that’s kept over from a returnable deposit at the end of the tenancy
If you let more than one property, the you must add together the profits and losses to arrive at one profit or loss figure for your property business.
However, you must keep profits and losses from overseas properties separate from those of properties in the UK.
Rules can vary, depending on if you’re:
- Letting a room in your home
- Letting a property as a furnished holiday letting
- Letting a foreign property
- Letting a property in the UK while you live abroad
How much tax will I pay on my rental income?
It is very important to keep accurate records of rent received and expenses incurred to work out the profit you’ll pay tax on.
Your rental profits are taxed at the same rates as income you receive from your business or employment; 0%, 20%, 40% or 45%, depending on which tax band the income falls into.
Your rental income is added to any other income you earn, which could move you into a higher tax bracket.
You earn £40,000 a year from your job, but you make £13,000 in profit from a rental property.
This will tip you over the £50,270 threshold for higher-rate tax in 2022-23, so you’ll pay 40% on the £2,730 above this threshold.
When do I pay tax on rental income?
You have to pay tax on the profits you make in each tax year – these run from 6th April to 5th April the following year.
You must declare rental income for the tax year it’s due, even if you’re not paid until the tax year is over.
In terms of expenses, you can deduct any allowable expenses which relate to work done for a particular tax year; it doesn’t matter whether you pay the bill before or after the end of the tax year.
HMRC ‘allow’ taxpayers to deduct certain costs from their income total before calculating tax. These includes things like:
- Professional fees, e.g. accountant fees, legal costs, agent fees
- Mortgage and property loan interest
- Ground rent
- Utility bills, e.g. energy, water
- Council tax
- Property maintenance and repairs
- Landlords’ insurance
Calculating your taxable profits
Finally, let’s look at the calculation used to work out the profit or loss for your property rental business:
(+) Add together all rent received
(+) Add together all allowable expenses
(–) Take away total expenses from total rent received
(–) Take away any capital allowances
(=) The result is the taxable profit or allowable loss
Tax on rental income: get professional advice
In case any of this information is still unclear, do not hesitate to contact Accountants East London for more advice.