How Much Tax Do Landlords Pay on Rental Income?

If you’ve recently dipped your toe into the property game, or perhaps are planning on developing a property portfolio, you need to seriously consider tax implications. How much tax landlords pay will have a huge impact on your profit and can determine whether you break even on your investment.

If you are worried about how much tax to pay on property income, this guide will explain who much tax landlords pay, plus how much rent income is tax free. 

As with many accountancy questions, how much tax you will pay will depend on many factors. Here’s what you can expect as a landlord… 

How much tax landlords pay will depend on the level of profit made on your property lettings. All your taxable income, not just property rental income and expenditure should be reported via a self-assessment tax return. How much tax a landlord then pays will depend on the total taxable income as the amount of tax calculated is linked to the total taxable income.

Do landlords get taxed?

Yes, all landlords do get taxed. How much tax you pay on property income though will depend on the situation. Here’s an example. 

Amount of taxable income (2022/23)	Rate of tax
Up to £12,570	0%
Between £12,571 to £50,270	20% (basic rate)
Between £50,271 to £150,000	40% (higher rate)
Over £150,000	45% (additional rate)

If you are a landlord, you will need to work out the net profit or loss for all your property lettings (except furnished holiday lettings) as if it’s a single business. To do this, you:

• add together all your rental income
• add together all your allowable expenses
• take the expenses away from the income

Work out the profit or loss from furnished holiday lettings separately from any other rental business to make sure you only claim these tax advantages for eligible properties.

Handy Hint: It’s not a legal requirement for landlords to have an accountant, but it’s advisable if you are not sure how to report your income and tax to HMRC.

Making a loss

Deduct any losses from your profit and enter the figure on your Self-Assessment form.

You can offset your loss against:

• future profits by carrying it forward to a later year
• profits from other properties (if you have them)

You can only offset losses against future profits in the same business.

You must pay Class 2 National Insurance if your profits are £6,725 a year or more and what you do counts as running a business, for example, if all the following apply:

• being a landlord is your main job
• you rent out more than one property
• you’re buying new properties to rent out

If your profits are under £6,725, you can make voluntary Class 2 National Insurance payments, for example, to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants, and arranging tenancy agreements.

FAQs on landlords and tax

Are property landlords self-employed?

Being a landlord does not necessarily mean that you’re self-employed. A person who is liable to Income Tax on the profits of a trade, profession, or vocation will generally also be a self-employed earner for National Insurance contributions (NICs) purposes. As a self-employed earner, they will be liable to pay Class 2 NICs.

The nature of property letting requires some activity to maintain the investment, but that is not enough to make it a business. 

For example, being a landlord normally involves:

• undertaking or arranging for external and internal repairs
• preparing the property between lets
• advertising for tenants and arranging tenancy agreements
• generally maintaining common areas in multi-occupancy properties; or
• collecting rents.

For a property owner or landlord to be a self-employed earner, their property management activities must extend beyond those generally associated with being a landlord (which include, but are not limited to, the above).

For example, ownership of multiple properties, actively looking to acquire further properties to let, and the letting of property being the property owner’s main occupation could be pointers towards there being a business for NICs purposes.

A landlord will also be a self-employed earner if any of their activities amount to a trade for Income Tax purposes. 

This could include, for example, receiving income from other services such as providing a bank of washing machines in a multi-occupancy block that is rented to tenants, or providing an ironing service to tenants. 

Running a guest house or hotel will also usually amount to a trade for Income Tax purposes, so an individual proprietor will be a self-employed earner for NICs purposes.

If a property owner has an agent who manages their property for them, things that the agent does should be attributed to the owner. ‘Agent’ includes a friend or family member, as well as a professional managing agent. 

However, a property owner will only be a self-employed earner on this basis if the things that the agent does for them (ignoring any other clients they might have) are enough to count as a business or trade.

Examples

Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.

Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.

Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. 

If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.

Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. 

If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.

You must pay Class 2 National Insurance if your profits are £6,725 a year or more and what you do counts as running a business, for example, if all the following apply:

• being a landlord is your main job
• you rent out more than one property
• you’re buying new properties to rent out

If your profits are under £6,725, you can make voluntary Class 2 National Insurance payments, for example, to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants, and arranging tenancy agreements.

How much rent income is tax-free?

As far as property taxes are concerned, the rent-a-room scheme and the new property allowance provide the opportunity for tax-free property income. You could enjoy a rental income of £8,500 tax-free.

It is possible to take advantage of both rent-a-room and the property allowance to enjoy tax-free property income of up to £8,500 per tax year – as long as the individual has more than one property rental income stream. 

So, an individual who lets out a room in their home, and, say a buy-to-let property, can claim both rent-a-room relief and the property allowance.

If you own property personally the first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’. Check out our ‘can a small business do their own taxes’ guide for more information.

If your rental property income is between £1,000 and £2,500 you will need to contact HMRC.

You must report how much rental income you have if it’s:

• £2,500 to £9,999 after allowable expenses
• £10,000 or more before allowable expenses

The Rent-a-Room Scheme

The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.

You can let out as much of your home as you want.

The tax exemption is automatic if you earn less than £7,500. This means you do not need to do anything.

If you earn more than this, you must complete a tax return.

You can then opt into the scheme and claim your tax-free allowance. You do this on your tax return.

You can choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.

Read the Rent a Room helpsheet for more detailed information on how to complete the form, and when it makes sense to opt-out of the scheme.

What happens if I don’t declare rental income?

You can declare unpaid tax by telling HMRC about rental income from previous years. If you have to pay a penalty, it’ll be lower than if HMRC find out about the income themselves.

You’ll be given a disclosure reference number. You then have 3 months to work out what you owe and pay it.

Do not include the £1,000 tax-free property allowance for any tax years before 2017 to 2018.

Penalties for late filing or late payment differ according to which tax you are dealing with.

If you don’t declare rental income the inaccuracy penalty is calculated as follows.

If a penalty arises because of a lack of reasonable care, the level of the penalty will depend on the reasons for the error and the potential lost revenue. The potential lost revenue is an additional amount of tax which is due or payable because of correcting the inaccuracy.

For example, if:

• a penalty arises because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
• the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
• the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due

The penalty can be reduced if you or your client tell HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure. Penalties can be reduced by:

• telling HMRC about the errors
• helping HMRC work out what extra tax is due
• giving HMRC access to check the figures

How can HMRC find out about rental income?

When it comes to considering how can HMRC find out about rental income you need to think about the tools at their disposal.

• HM Land Registry shares its data with HMRC.
• Stamp duty land tax when you purchase a rental property
• Electoral register (your registration in the electoral register is carried out via your National Insurance number)
• Estate Agents/Letting Agents if they manage your properties – estate agents are required to perform checks on client’s financial backgrounds including evidence of income, identity etc which HMRC can use if they suspect malicious activity
• Security deposit – with a shorthand tenancy the landlord is legally bound to place the security deposit in a government-rated tenancy scheme which HMRC have access
• Informants

To find out the new ways that HMRC are now using data to analyse who should be investigated read the full article on ‘what triggers an HMRC audit/investigation’.

Handy Hint: Read our guide to how VAT on rental deposits works.

What happens if I don’t declare rental income?

If you are renting out property as a landlord, and are not declaring rental income for tax, and HMRC catches you, it’s a big problem.

As it stands, HMRC can reclaim up to 20 years’ worth of unpaid tax payments from rental income. Avoiding tax can also mean you are fined up to the total value of any unpaid tax, then the underpaid tax on top.

In short, don’t try to dodge paying tax as a landlord. 

Conclusion

Nothing in relation to being a landlord and tax is straightforward. Something as seemingly simple as how much tax landlords must pay is never straight-forward.

The type of rental income you receive, how much, and whether it is best to take tax reliefs and not offset costs are all things that require judgment, skill, and an understanding of the UK tax system.

If you are comfortable with these things and happy to keep up to date with the legislation which changes each year, then do it without the support of an accountant. For those that would feel much more comfortable putting this in the hands of a professional then you should seek the help of an accountant or bookkeeper.

The rules around property income are complex so if you do decide to hire a professional make sure you use someone that has a good working knowledge of this area so you can be certain of the benefits outweigh the costs.

More small business owner guides…

• What your responsibilities are as a company director

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