As a landlord of residential properties in the United Kingdom, it is essential to be well-informed about the tax implications on rental income. This blog post will provide a clear and concise explanation of how the UK tax system works for landlords, the various allowable expenses that can be claimed, and the changes that have taken place in recent years. We will also offer examples to illustrate the concepts discussed.
Overview of UK Tax on Rental Income
When renting out a residential property in the UK, the rental income received is subject to tax. The tax liability is based on the net rental income, which is the total rent received minus allowable expenses. The amount of tax payable depends on the individual’s total taxable income, which includes earnings from employment, self-employment, and other sources.
Tax Rates Applicable to Rental Income
In the UK, rental income is taxed according to the individual’s income tax band. There are three main tax bands, and they are:
- Basic rate (20%) – applicable to taxable income between £12,571 and £50,270
- Higher rate (40%) – applicable to taxable income between £50,271 and £150,000
- Additional rate (45%) – applicable to taxable income over £150,000
The tax rate applied to your rental income will depend on which band your total taxable income falls within.
How to Calculate Net Rental Income
Calculating the net rental income requires subtracting allowable expenses from the total rent received. Allowable expenses are costs directly related to the rental property, and they can be used to reduce the taxable rental income. Some common examples of allowable expenses include:
- Mortgage interest (restricted for higher and additional rate taxpayers)
- Property repairs and maintenance
- Insurance premiums
- Agent fees and commissions
- Council tax and utility bills (if paid by the landlord)
- Legal fees for drawing up tenancy agreements
It is important to keep accurate records of all expenses related to your rental property, as they can help reduce your tax liability.
Changes to Mortgage Interest Tax Relief
In recent years, the UK government has made changes to mortgage interest tax relief for landlords. Before April 2017, landlords could deduct their mortgage interest payments as an allowable expense, which reduced their taxable rental income.
However, since the 2020/2021 tax year, mortgage interest tax relief has been replaced with a tax credit. This change affects higher and additional rate taxpayers. Instead of deducting mortgage interest payments from rental income, landlords now receive a basic rate tax credit (20%) on the mortgage interest paid.
This means that higher and additional rate taxpayers can no longer offset their mortgage interest against their rental income, which could result in a higher tax liability.
Example of Calculating Tax on Rental Income
Here is a simple example to demonstrate how to calculate tax on rental income:
Jane has an annual salary of £35,000 and receives an additional £15,000 in rental income from her residential property. Her total taxable income is £50,000, which falls within the basic rate tax band.
Jane’s allowable expenses for the property amount to £5,000. To calculate her net rental income, she subtracts her allowable expenses from her rental income:
£15,000 (rental income) – £5,000 (allowable expenses) = £10,000 (net rental income)
As her total taxable income falls within the basic rate tax band, Jane will pay a 20% tax on her net rental income:
£10,000 (net rental income) × 20% (basic rate) = £2,000 (tax payable on rental income)
Conclusion
Understanding the UK tax system for rental income is crucial for landlords of residential properties. By being aware of the applicable tax rates, calculating net rental income accurately, and keeping up-to-date with changes to mortgage interest tax relief, landlords can ensure they comply with their tax obligations and avoid any potential penalties.
It is essential to maintain accurate records of all income and expenses related to your rental property, as these will be needed when completing your annual self-assessment tax return. In addition, it is worth seeking advice from a professional accountant or tax adviser if you are unsure about any aspect of your tax liability.
At Southside Accountants Wimbledon, we are here to help you navigate the complexities of the UK tax system. Our team of experienced accountants can provide expert guidance and support to ensure you remain compliant with your tax obligations while maximising your rental income. Contact us today to learn more about how we can assist you with your rental property tax needs.
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