Tax on rental income: how UK landlords are taxed in 2026

Rental income in the UK is taxed as property income at your marginal rate of income tax, after deducting allowable expenses, and is reported to HMRC through Self Assessment. Most landlords pay tax on their rental profit at 20%, 40% or 45% depending on their total income, with mortgage interest relief restricted to a 20% tax credit under Section 24. Two changes shape 2026: Making Tax Digital for Income Tax went live on 6 April 2026, and from April 2027 rental profit will be taxed at new, higher property income rates. This guide explains how the tax is calculated, what you can deduct, how to report it, and what is changing.

What counts as rental income

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

You must declare all rental income to HMRC, whether or not you make a profit. Even if your allowable expenses exceed your rental income and you make a loss, you report it, and the loss can be carried forward to offset profits in future years. Rental income is treated as unearned income and taxed as part of your total income at your marginal rate, so the rate you pay depends on your other income combined with your rental profit.

UK income tax bands for 2026/27

Income tax applies in bands, with a different rate on the income that falls in each. For the 2026/27 tax year (6 April 2026 to 5 April 2027) the rates in England, Wales and Northern Ireland are a £12,570 personal allowance taxed at 0%, a basic rate of 20% from £12,571 to £50,270, a higher rate of 40% from £50,271 to £125,140, and an additional rate of 45% above £125,140. These thresholds are frozen until April 2031, so the figures are unchanged from 2025/26.

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

Scotland sets its own income tax rates on earned and rental income, with six bands for 2026/27: a starter rate of 19%, basic rate of 20%, intermediate rate of 21%, higher rate of 42%, advanced rate of 45% and top rate of 48%, with thresholds that differ from the rest of the UK. Scottish landlords should use the Scottish rates when working out tax on rental profit.

New property income tax rates from April 2027

From 6 April 2027, rental profit will be taxed at its own rates, set 2 percentage points above the equivalent income tax bands: 22% for basic-rate taxpayers, 42% for higher-rate taxpayers and 47% for additional-rate taxpayers. Confirmed in the Autumn Budget 2025, this creates a separate property income tax regime for the first time. The basic-rate tax credit for mortgage interest under Section 24 rises to 22% in step with the new basic rate. The change is not yet in force, but mortgaged landlords in particular should factor it into any planning before April 2027.

How taxable rental profit is calculated

Your taxable rental profit is rental income minus allowable expenses, minus any capital allowances that apply, with the result added to your other income to determine your band and total tax. Accurate records make this straightforward, and software that categorises income and expenses as they happen produces figures that are ready for your return or your accountant.

Are landlords self-employed, and do they pay National Insurance?

Letting property is normally treated as investment income rather than running a trade, so most landlords are not classed as self-employed and do not pay National Insurance on their rental profit. The position changes only where the letting amounts to a genuine trade, such as a guest house or serviced accommodation provided with substantial services, in which case the profit can be trading income and National Insurance may apply. If your activity sits near that line, take advice, because the classification affects both your National Insurance position and how you report the income.

Allowable expenses you can claim

Allowable expenses are costs incurred wholly and exclusively for your rental business, deducted from rental income before tax is calculated. Common examples include property maintenance and repairs (but not improvements), utility bills and council tax where you pay them, service charges and ground rent on leasehold property, landlord insurance, letting agent and management fees, accountancy and certain legal fees, safety certificate costs, advertising, property management software, and travel to the property at HMRC’s mileage rates of 45p per mile for the first 10,000 miles and 25p thereafter. Mortgage interest is handled separately under Section 24, below. For the full list of what does and does not qualify, see our guide to allowable expenses for landlords.

Capture and categorise every deductible expense as it happens with August, so your figures are ready at tax time.

The mortgage interest restriction: Section 24

Until April 2017, landlords could deduct mortgage interest as an expense. Section 24 of the Finance Act 2015 changed that. Finance costs can no longer be deducted from rental income when calculating taxable profit. Instead, you receive a basic-rate tax credit worth 20% of your finance costs (or 20% of your taxable rental profit, if lower). The credit rises to 22% from April 2027 in line with the new property basic rate.

The restriction particularly affects higher and additional-rate taxpayers, who previously received relief at 40% or 45% but now receive only the basic-rate credit. It also means profit is calculated before deducting mortgage interest, which can push income into a higher band.

Worked example

Sarah earns £45,000 from employment and lets a property generating £20,000 rent a year. Her allowable expenses, excluding mortgage interest, are £5,000, and she pays £10,000 mortgage interest.

Under the old system her taxable rental profit was £5,000 (£20,000 minus £5,000 minus £10,000), taking her total income to £50,000, with £1,000 tax on the rental profit at 20%.

Under Section 24 her taxable rental profit is £15,000 (mortgage interest no longer deducted), taking her total income to £60,000. Of that £15,000, £5,270 falls in the basic-rate band (taxed at 20%, or £1,054) and £9,730 in the higher-rate band (taxed at 40%, or £3,892), giving £4,946 before relief. She then receives a £2,000 credit (20% of £10,000 interest), leaving £2,946 of tax on the rental profit. That is around £1,946 more than under the old rules, on the same income.

The property allowance

The property allowance gives £1,000 of tax-free property income a year. If your gross rental income is £1,000 or less, you do not need to report it or pay tax on it. If it is more, you choose between claiming your actual expenses or deducting the flat £1,000 allowance instead. Most landlords with a genuine rental business find their actual expenses far exceed £1,000, making itemised claims more valuable, but the allowance is convenient for someone letting informally.

Replacement of domestic items relief

The old 10% wear and tear allowance for furnished lettings ended in April 2016. In its place, you can claim the cost of replacing moveable domestic items such as furniture, carpets, curtains, white goods and kitchenware. You claim the cost of the replacement, not the original purchase, and you must actually replace the item and keep the receipt rather than claiming a flat percentage.

The Rent-a-Room scheme

The Rent-a-Room scheme gives £7,500 of tax-free income a year for letting furnished accommodation in your own home. If you earn £7,500 or less from lodgers, the income is tax-free with no reporting required. Above £7,500, you either claim actual expenses and pay tax on the profit, or claim the £7,500 allowance and pay tax only on income above it. This makes live-in letting to a lodger very tax-efficient compared with a standard buy-to-let.

Furnished holiday lettings have ended

The separate furnished holiday lettings regime, which gave short-term holiday lets favourable treatment such as full mortgage interest relief and capital allowances, was abolished from 6 April 2025. Former holiday lets are now taxed as standard property income under the same rules as any other rental, including the Section 24 interest restriction.

Reporting rental income through Self Assessment

You must register for Self Assessment if your gross rental income is above £1,000, and the deadline to register is 5 October following the end of the tax year in which you first received rent. Landlords report property income on the SA105 supplementary pages of the return. The online return and any tax due must be filed by 31 January, alongside the first payment on account, with a second payment on account due 31 July.

Late filing carries automatic penalties: £100 if the return is up to three months late, then £10 a day up to £900 for returns three to six months late, and £300 or 5% of the tax due (whichever is higher) beyond six months. Our guide to registering with HMRC as a landlord walks through the process step by step.

Across the self-managing landlords we work with at August, the most common filing problem is not a missed deduction but a missing record, where a legitimate expense cannot be claimed because the receipt was lost months earlier.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax has applied since 6 April 2026 to landlords whose gross property and self-employment income exceeded £50,000 in the 2024/25 tax year. Those landlords must keep digital records and send HMRC a quarterly update using compatible software, followed by a final declaration by 31 January. The threshold then steps down to £30,000 from April 2027 and £20,000 from April 2028, which will eventually bring most landlords into the regime. Landlords who hold property through a limited company are not affected by Making Tax Digital for Income Tax. Our Making Tax Digital guide sets out the timetable and software requirements in full.

Landlords moving through their first quarter on August tell us the shift from one annual return to four updates is manageable when income and expenses are recorded as they happen rather than reconstructed at year end.

Capital gains tax when you sell

When you sell a rental property for more than you paid, capital gains tax applies to the gain above the annual exempt amount, which is £3,000 for 2026/27. The residential property rates are 18% for gains within your remaining basic-rate band and 24% for higher and additional-rate taxpayers.

You work out the gain by taking the sale price and deducting the original purchase price, the costs of buying and selling (such as stamp duty, legal and agent fees) and the cost of qualifying capital improvements. You can also set off capital losses from earlier years and claim Private Residence Relief for any period the property was your main home. The gain must be reported and the tax paid within 60 days of completion using HMRC’s online service, a tight deadline that catches many landlords out.

Should you hold property through a limited company?

Some landlords let through a limited company, where profits are taxed at corporation tax rates of 19% to 25% and mortgage interest remains fully deductible, which can compare favourably with personal rates, particularly ahead of the 2027 rise. Incorporation is not automatically better: transferring property into a company can trigger capital gains tax and a stamp duty charge, and a company has its own running and profit-extraction costs. Our guide to whether a limited company is right for you weighs the trade-offs, and this is a decision to take with an accountant.

Practical ways to manage your tax

A few legitimate steps reduce the tax you pay while staying compliant. Claim every allowable expense by keeping complete records, since poor record-keeping is where most landlords lose money. Time large improvement costs with care, because they cannot be set against income but do reduce a later capital gain. Where one partner pays tax at a lower rate, a genuine transfer of ownership share can reduce the household’s overall tax. And if you sell more than one property, completing in different tax years can use more than one year’s capital gains exemption.

Keeping records

HMRC requires landlords to keep rental business records for at least six years after the end of the tax year they relate to, covering income received, receipts and invoices for expenses, mileage logs, bank and mortgage statements, tenancy agreements and inventories. Digital records satisfy this and, for landlords above the £50,000 threshold, are now mandatory under Making Tax Digital. Keeping them in one place means you can produce clean figures for an accountant or respond to an HMRC enquiry without digging through paper and email.

Keep tax-ready records and run the reports you need for every property in one place with August. Start for free.

Frequently asked questions

Do you pay tax on rental income? Yes, unless your gross rental income is £1,000 or less, which is covered by the property allowance. Above that, you pay income tax on your rental profit through Self Assessment at your marginal rate.

How much tax do landlords pay on rental income? Rental profit is taxed at your income tax rate, so 20%, 40% or 45% in 2026/27 depending on your total income. From April 2027 property income has its own rates of 22%, 42% and 47%.

Do landlords pay National Insurance? Usually not, because letting property is normally investment income rather than a trade. National Insurance can apply where the activity amounts to a genuine trade, such as serviced accommodation with substantial services.

When do I have to register for Self Assessment? Register with HMRC by 5 October following the end of the tax year in which you first received rental income above £1,000. The return and first payment are then due by 31 January.

Has Making Tax Digital started for landlords? Yes. It has applied since 6 April 2026 for landlords with property and self-employment income over £50,000, with the threshold dropping to £30,000 in 2027 and £20,000 in 2028.

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. Tax rules can change and are different for different situations. Always speak to a suitably qualified professional if you require specific advice or information.