Rental income tax basics

How rental income is taxed

Rental income from UK property is taxed as part of your total income each tax year. You pay tax on profit (gross rent minus allowable expenses) at your marginal rate of income tax (basic, higher, or additional rate).

You report rental profit on the property pages of your Self Assessment tax return. Profits and losses are calculated for your property business as a whole, not property by property, so a loss on one rental can offset a profit on another.

The £1,000 property allowance

If your gross rental income is £1,000 or less in a tax year, you usually do not need to declare it or pay tax on it. This is called the property allowance.

If your gross rental income is more than £1,000, you can either deduct your actual expenses or claim the £1,000 allowance, whichever gives you more relief. You cannot do both.

• If you own a property jointly with others, each owner gets a £1,000 allowance against their share of the gross rent.
• Gross income means the rent before any expenses. The allowance cannot be used to create a loss: you cannot deduct more than your income.
• HMRC says to contact it if gross property income is over £1,000 and up to £2,500, and to register for Self Assessment if it is over £2,500.
• If you have two businesses and claim the property allowance in one, you may not claim actual expenses in respect of the other.
• You cannot use the property allowance on income from letting a room in your own home under the Rent a Room Scheme.

Read GOV.UK guidance on tax-free allowances on property and trading income for the full rules.

Section 24: the mortgage interest rule

Since 6 April 2020, individual landlords can no longer deduct mortgage interest from rental income as an expense. Instead, you receive a 20% basic-rate tax credit on the interest you pay.

Higher-rate and additional-rate taxpayers feel this most: before Section 24, mortgage interest reduced taxable profit at 40% or 45%; now the relief is capped at 20%. This is one reason many landlords have moved to limited company structures.

Section 24 does not apply to limited companies or commercial property.

For more detail, read our guides to Section 24 and allowable expenses.

Rent a Room Scheme

If you let furnished accommodation in your own home, the Rent a Room Scheme lets you earn up to £7,500 a year tax-free. The limit is halved to £3,750 if you share the income with someone else. The exemption is automatic if you earn less than the limit, so you do not need to do anything.

If you earn more than the limit you must complete a tax return. You can then opt in to the scheme and claim the tax-free amount on the return, or opt out and record your income and expenses on the property pages. You can opt in if you are a resident landlord, whether or not you own your home, or you run a bed and breakfast or guest house. You cannot use it for homes converted into separate flats.

GOV.UK: Rent a room in your home

Non-resident landlords

If you live outside the UK, a letting agent or tenant normally deducts tax when they pay you rent for a UK property. Under the non-resident landlord scheme you can apply to HMRC to receive your rent without UK tax deducted. You can apply online or with form NRL1, and a tax agent can act for you using form 64-8.

HMRC normally approves an application if it is complete and correct and HMRC is satisfied that you will follow all your UK tax obligations. It sends a notice to you and to any tenants or letting agents named on the form, and the notice gives the date from which rent can be paid without deduction (usually the first day of the quarter in which HMRC received the application). If HMRC refuses, you can appeal in writing within 90 days of the notice.

GOV.UK: Apply as an individual to receive UK rental income without UK tax deducted

What you report on your tax return

• Total rent received in the tax year (6 April to 5 April)
• Allowable expenses, broken down by category
• Mortgage interest paid (entered separately as a finance cost for the Section 24 calculation)
• Any rental losses brought forward from prior years

What if you make a rental loss?

A rental loss cannot be set against your other income (employment, self employment, etc.). It can only be carried forward and offset against future rental profits from the same property business.

Summary

• Rental profit is added to your other income and taxed at your marginal rate
• The £1,000 property allowance covers small rental income
• Section 24 limits mortgage interest relief to 20% for individuals
• Rental losses carry forward, not sideways
• Rent a Room lets you earn up to £7,500 tax-free from a furnished room in your own home
• Non-resident landlords can apply to receive rent without UK tax deducted