Property income
Property income is the term HMRC uses for taxable receipts from letting residential property in the UK. Under Part 3 of the Income Tax (Trading and Other Income) Act 2005, rental receipts from residential lettings are treated as a single "UK property business" regardless of how many properties a landlord owns. Gross rental receipts, service charge income, and certain other amounts received in connection with the letting are pooled together and taxed as property income in the tax year they arise.
The property income allowance
The first £1,000 of gross property income in a tax year is covered by the property allowance, a flat-rate exemption that replaces all deductions for that income stream. A landlord whose total gross property income does not exceed £1,000 in a tax year has no obligation to report it to HMRC and pays no tax on it. Where gross income exceeds £1,000, the landlord can choose between claiming the allowance (and deducting nothing further) or deducting actual allowable expenses in the usual way, whichever produces the lower tax bill. The two cannot be combined for the same income stream.
Calculating property income: receipts less allowable expenses
Where the property allowance is not claimed, a landlord calculates taxable property income by taking gross rental receipts and deducting allowable expenses incurred wholly and exclusively for the letting. Typical allowable expenses include letting agent fees, landlord insurance, repairs that restore something to its original condition (not improvements or capital works), accountancy fees, and ground rent on leasehold properties. The resulting figure is the rental profit, or property income loss if expenses exceed receipts.
Property income losses can only be carried forward and set against future property income from the same UK property business. They cannot be set against employment income, dividend income, or any other income source in the same or earlier tax years.
The mortgage interest restriction
Landlords who own residential rental properties personally, rather than through a limited company, cannot deduct mortgage interest in full from their property income. Under the finance cost restriction rules introduced by the Finance (No. 2) Act 2015 (commonly called the "Section 24" restriction), mortgage interest is instead allowed as a basic-rate (20%) tax reduction applied after the tax liability has been calculated. The effect is that higher-rate and additional-rate taxpayers pay more tax on property income than their cash profit would suggest, taxable property income can be materially higher than actual cash receipts after mortgage costs.
This restriction applies to residential lettings held personally. It does not apply to limited company landlords, commercial property, or furnished holiday lettings (for properties that qualified under the FHL regime, note that the FHL regime was abolished from April 2025 and former FHL income is now pooled with residential rental income for most purposes).
Income tax rates and Self Assessment
Property income is taxed as non-savings income at the taxpayer's marginal rate: 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers, in each case on taxable property income above personal allowances and after any relevant reliefs. A landlord whose total income, employment plus property plus other sources, crosses a rate band will pay the higher rate on the slice above the threshold.
Property income must be reported through Self Assessment. The annual return is due by 31 January (online) following the end of the tax year. A payment on account system applies where the previous year's Self Assessment tax bill exceeded £1,000.
Making Tax Digital
From April 2026, landlords with gross property income above £50,000 (to be reduced to £30,000 from April 2027) are required to keep digital records and submit quarterly updates to HMRC under Making Tax Digital for Income Tax. Annual property income is reported and finalised through an end-of-period statement rather than a traditional Self Assessment return. August's expenses tracking and MTD-ready reporting tools record rental income and allowable expenses in the categories HMRC requires, making both Self Assessment and quarterly MTD submissions straightforward from the same dashboard.
For a full guide to income tax bands, the payment on account system, Self Assessment deadlines, and how property income interacts with other income sources, see the August guide to how rental income is taxed in the UK.
Frequently asked questions
What is the property income allowance and how does it work?
The property income allowance is a £1,000 gross income exemption available to landlords each tax year. If total gross property income does not exceed £1,000, it need not be reported to HMRC and no tax is payable. If gross income exceeds £1,000, the landlord can either claim the full £1,000 allowance (and deduct nothing else) or instead deduct actual allowable expenses, whichever produces the lower tax bill. The two approaches cannot be combined for the same letting.
Can property income losses reduce other income for tax purposes?
No. A UK property business loss can only be carried forward against future property income from the same property business. It cannot be set against employment income, pension income, dividends, or any other income stream in the same or a prior tax year. The carry-forward is unlimited in time, losses can accumulate and be relieved whenever the business returns to profit.
How does the Section 24 mortgage interest restriction work?
Individual landlords of residential property cannot deduct mortgage interest directly from their property income. Instead, a basic-rate (20%) tax reduction is applied after the tax on property income has been calculated. This means a higher-rate taxpayer pays 40% tax on their gross property income (before mortgage interest) and receives only 20% back as a reduction, effectively paying 20% more tax than they would if full deduction were allowed. The restriction does not apply to limited companies or to commercial property.
When must a landlord register for Making Tax Digital for Income Tax?
From April 2026, landlords with gross property income (or combined property and self-employment income) above £50,000 in the prior tax year must use MTD-compatible software, keep digital records, and submit quarterly updates to HMRC. The threshold reduces to £30,000 from April 2027. Landlords below these thresholds continue to report through traditional Self Assessment until further notice.
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