How rental income is taxed in the UK: bands and allowances

Rental income taxation sits at the heart of buy-to-let profitability, yet many landlords struggle to understand exactly how HMRC taxes property income. Between income tax bands, allowable deductions, mortgage interest restrictions, and changing regulations like Making Tax Digital, calculating your actual tax liability can feel overwhelming. This comprehensive guide explains how UK rental income is taxed, what allowances and deductions you can claim, how tax bands apply, and provides practical examples showing real calculations landlords face.

Understanding rental income and property taxation

Rental income means money received from letting property. This includes monthly rent payments, fees for additional services provided with the property, advance payments covering future rental periods, payments tenants make for your expenses like utility bills, and lease premiums for short leases under 50 years.

You must declare all rental income to HMRC through Self-Assessment tax returns regardless of whether you make a profit. Even if your allowable expenses exceed rental income, creating a loss, you must report this on your return. The loss can offset profits in future years.

Rental income is classified as unearned income and taxed as part of your total income at your marginal income tax rate. This means the rate you pay depends on your other income sources combined with your rental profits.

UK income tax bands for 2025-26

Income tax operates through bands with different rates applying to income falling within each threshold. For the 2025-26 tax year (6 April 2025 to 5 April 2026), the rates in England, Wales, and Northern Ireland are:

Personal Allowance (0%) - £12,570. This is the amount you can earn tax-free before any income tax applies.

Basic rate (20%) - £12,571 to £50,270. Most small landlords with rental income fall into this band.

Higher rate (40%) - £50,271 to £125,140. Many portfolio landlords with multiple properties reach this threshold when rental profits combine with employment income.

Additional rate (45%) - Over £125,140. Larger landlords and those with substantial other income face this top rate.

Scotland uses different bands and rates. The personal allowance remains £12,570, but Scottish income tax has five bands - starter (19%), basic (20%), intermediate (21%), higher (42%), and top (47%) with different thresholds.

Your rental income stacks on top of your other income to determine which tax band applies. If you earn £40,000 from employment and receive £15,000 rental profit, your total income of £55,000 pushes some rental profit into the higher rate band.

Calculating taxable rental income

Your taxable rental profit equals rental income minus allowable expenses. The calculation follows this structure:

Total rental income received during the tax year, minus all allowable expenses you can claim, minus capital allowances where applicable, equals your taxable rental profit, which is then added to your other income to determine your tax band and total tax liability.

Proper record keeping makes this calculation straightforward. Modern property management software tracks rental income and expenses automatically, categorising transactions and generating reports ready for your accountant or Self-Assessment return.

Allowable expenses landlords can claim

Allowable expenses are costs incurred wholly and exclusively for your rental business that you can deduct from rental income before calculating tax. These significantly reduce your tax liability.

Property maintenance and repairs - Fixing broken appliances, repairing leaks, redecorating, replacing worn carpets, servicing boilers, and general upkeep all qualify. However, improvements that enhance the property beyond its original condition don't count as allowable repairs.

Utility bills you pay - Water, gas, electricity, and council tax where you pay rather than the tenant. Most tenancies require tenants to pay utilities, but you can claim these if you cover them.

Service charges and ground rent - For leasehold properties, service charges, ground rent, and management fees paid to freeholders or management companies.

Insurance premiums - Landlord insurance including buildings cover, contents insurance for furnished properties, public liability insurance, and rent guarantee insurance.

Legal and professional fees - Accountancy fees, legal costs for renewing leases under 50 years or evicting tenants, and costs defending your letting rights.

Letting agent fees - Commission paid to letting agents for finding tenants, rent collection, and property management.

Property management software - Subscriptions to landlord software like August for managing tenancies, tracking rent, and maintaining compliance records.

Safety certificates - Gas Safety Certificates, EICR inspections, EPC assessments, and other mandatory safety compliance costs.

Marketing costs - Advertising vacant properties on rental listing sites, professional photography, and signage.

Travel expenses - Mileage at 45p per mile for the first 10,000 miles and 25p thereafter when travelling to properties for inspections, maintenance, or tenant meetings. Alternatively, claim actual vehicle costs proportionate to business use.

Finance costs - This requires special attention due to recent tax changes affecting mortgage interest relief.

The mortgage interest tax restriction

Until April 2017, landlords could deduct mortgage interest as an allowable expense before calculating tax. Section 24 of the Finance Act 2015 changed this fundamentally, creating the mortgage interest tax restriction that significantly affects higher-rate taxpayers.

Now, mortgage interest and finance costs cannot be deducted from rental income when calculating taxable profit. Instead, you receive a basic rate (20%) tax credit based on your finance costs or 20% of your taxable rental profit, whichever is lower.

This change particularly impacts higher and additional rate taxpayers because they previously received tax relief at 40% or 45% on mortgage interest, but now only receive 20% relief through the tax credit.

For basic rate taxpayers, the net effect remains similar to before the restriction. However, reporting requirements changed - you must calculate profit before deducting mortgage costs, potentially pushing income into higher bands even though you cannot deduct the mortgage interest.

Example of mortgage interest restriction impact

Sarah earns £45,000 from employment and owns a rental property generating £20,000 annual rent. Her allowable expenses (excluding mortgage interest) total £5,000, and she pays £10,000 mortgage interest annually.

Under the old system (pre-April 2017):

Rental income - £20,000, minus allowable expenses - £5,000, minus mortgage interest - £10,000, equals taxable rental profit - £5,000. Total taxable income - £50,000 (£45,000 + £5,000). Tax on rental profit - £1,000 (£5,000 at 20% basic rate).

Under current restrictions:

Rental income - £20,000, minus allowable expenses - £5,000, equals taxable rental profit - £15,000 (mortgage interest not deducted). Total taxable income - £60,000 (£45,000 + £15,000), pushing £9,730 into the higher-rate band. Tax on rental profit before relief - £5,946 (£5,270 at 20% + £9,730 at 40%). Tax credit for mortgage costs - £2,000 (20% of £10,000 mortgage interest). Net tax on rental profit - £3,946 (£5,946 - £2,000).

Sarah now pays £2,946 more tax annually on the same rental income due to mortgage interest restrictions.

Property allowance

The property allowance provides £1,000 annual tax relief for property income. If your total rental income before expenses is £1,000 or less, you don't need to report it or pay tax on it.

If your rental income exceeds £1,000, you choose between claiming actual expenses as detailed above, or deducting the £1,000 property allowance instead of claiming expenses. For landlords with minimal expenses, the flat £1,000 deduction might prove simpler.

Most landlords with serious rental businesses find actual expenses exceed £1,000 significantly, making itemised expense claims more beneficial. However, landlords renting a single room informally might find the property allowance convenient.

Wear and tear allowance - now replaced

Previously, landlords letting furnished properties claimed a 10% wear and tear allowance automatically without proving actual costs. HMRC abolished this from April 2016, replacing it with a "replacement of domestic items" relief.

Now, you can claim the cost of replacing moveable furnishings, appliances, kitchenware, and similar domestic items. This includes furniture, carpets, curtains, beds, sofas, white goods, crockery, and utensils. You claim the cost of the new item, not the original purchase price.

This change means you must actually replace items and keep receipts to claim relief, rather than claiming a flat percentage automatically.

Rent-a-Room scheme

The Rent-a-Room scheme offers £7,500 annual tax relief for letting furnished accommodation in your main home. If you earn £7,500 or less from lodgers, the income is completely tax-free with no reporting required.

Income above £7,500 gives you two options. Either claim actual expenses and pay tax on profit, or claim the £7,500 allowance and pay tax only on income exceeding this threshold with no expense deductions.

For landlords renting spare rooms to lodgers, this generous allowance makes live-in letting very tax-efficient compared to traditional buy-to-let.

Reporting rental income through Self-Assessment

All landlords with gross rental income above £1,000 must register for Self-Assessment and file annual tax returns. Registration must happen by 5 October following the tax year when you first receive rental income.

The UK tax year runs from 6 April to 5 April. For the 2025-26 tax year ending 5 April 2026, you must file your return and pay any tax due by 31 January 2027 for online submissions.

Late filing incurs automatic penalties - £100 if your return is up to three months late, then additional daily penalties of £10 per day up to £900 for returns three to six months late, and £300 or 5% of tax due (whichever is higher) for returns over six months late.

Making Tax Digital for landlords

Making Tax Digital for Income Tax Self-Assessment becomes mandatory from 6 April 2026 for landlords with gross rental and self-employment income exceeding £50,000. This introduces quarterly digital reporting replacing annual tax returns.

Landlords affected must keep digital records using compatible software and submit quarterly updates to HMRC showing rental income and expenses for each quarter. Updates are due within one month of quarter-end. After the fourth update, you submit a final declaration by 31 January confirming total annual income.

For landlords approaching the £50,000 threshold, choosing Making Tax Digital-compatible software now prepares you for mandatory quarterly reporting whilst improving record accuracy and reducing year-end stress.

Capital Gains Tax on property disposal

When you sell a rental property, Capital Gains Tax (CGT) applies to profits above your annual exempt amount, currently £3,000 for 2025-26.

CGT rates for property are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. These rates are higher than CGT on other assets.

You calculate gains by taking the sale price, minus the original purchase price, minus costs of purchase (stamp duty, legal fees, survey), minus costs of sale (estate agent fees, legal fees), minus the value of qualifying capital improvements, which equals your taxable gain.

You can deduct capital losses from previous years against gains and claim Private Residence Relief if the property was ever your main home.

Report and pay CGT on residential property sales within 60 days using HMRC's online CGT service. This tight deadline catches many landlords unprepared.

Practical tax planning strategies

Effective tax planning reduces your liability legally whilst maintaining full compliance.

Maximise allowable expense claims - Keep meticulous records of every property-related cost. Use property management software to track expenses automatically and generate reports categorised for tax returns. Many landlords miss legitimate deductions simply through poor record-keeping.

Time capital expenditure strategically - Large improvement costs cannot be claimed as expenses but do reduce eventual CGT liability. Plan major refurbishments when they deliver maximum tax benefit.

Consider spouse income splitting - If one partner pays tax at a lower rate, transferring properties or ownership shares can reduce overall household tax. This requires genuine transfer of beneficial ownership with all associated responsibilities.

Evaluate limited company structures - Holding properties in a company incurs corporation tax at 19-25% rather than income tax rates up to 45%. However, extracting profits as dividends or salary creates additional tax. Professional advice helps determine whether incorporation makes financial sense for your circumstances.

Spread property sales across tax years - If selling multiple properties, completing some before 5 April and others after can utilise multiple years' CGT allowances.

Review your tax position regularly - Tax rules change frequently. The mortgage interest restriction took many landlords by surprise. Stay informed about legislative changes affecting rental taxation.

Record keeping requirements

HMRC requires landlords to keep rental business records for at least six years from the end of the tax year they relate to. This includes rental income records showing dates and amounts received, all receipts and invoices for allowable expenses, mileage logs for business travel, bank statements showing rental transactions, mortgage statements, tenancy agreements, and property inventory records.

Digital record keeping through landlord software like August satisfies these requirements whilst making records instantly accessible. You can export clean reports for accountants, respond quickly to HMRC enquiries, and ensure nothing gets lost in paper files or email folders.

Making Tax Digital requirements mandate digital record keeping for landlords above the £50,000 threshold from April 2026, making early adoption of proper systems sensible preparation.

Working with accountants

Many landlords benefit from professional accountancy support, particularly those with multiple properties, complex finances, or limited tax knowledge. Specialist landlord accountants understand property taxation thoroughly and typically identify additional allowable expenses and relief opportunities that pay for their fees multiple times over.

Even with an accountant, maintaining organised records throughout the year makes their job easier and reduces fees. Modern property management platforms export transaction data in formats accountants can import directly, eliminating manual data entry and reformatting.

Your accountant fees are themselves an allowable expense, reducing your tax liability for the year you pay them.

The bottom line on rental income taxation

Understanding how rental income is taxed protects your profitability and ensures full compliance with HMRC requirements. UK rental income faces income tax at your marginal rate after deducting allowable expenses, with mortgage interest restricted to 20% tax credit rather than full deduction.

Proper record-keeping, maximising legitimate expense claims, understanding tax bands and how your income stacks across employment and rental sources, preparing for Making Tax Digital if your income approaches £50,000, and seeking professional advice for complex situations all optimise your tax position legally.

The difference between stressed landlords and profitable ones often comes down to systems and knowledge. Invest in proper software for tracking rental income and expenses, stay informed about legislative changes, and treat rental property as the business it is with professional standards matching your obligations and opportunities.

Disclaimer: This article is a guide and not intended to be relied upon as legal or professional advice, or as a substitute for it. August does not accept any liability for any errors, omissions or misstatements contained in this article. Always speak to a suitably qualified professional if you require specific advice or information.