Rental profit

Rental profit is the taxable profit from letting a rental property, calculated as rental income minus the allowable costs of running the letting business, for each tax year from 6 April to 5 April. HMRC's guidance on renting out property treats all UK lettings by an individual as a single "property business", which means income and expenses from all properties are pooled together when calculating the overall rental profit or loss for Self Assessment purposes.

Rental profit, rental income, and rental cashflow are three distinct concepts: income is the gross rent received before any deductions; profit is the taxable figure after allowable expenses; cashflow is the net money left each month after all outgoings including mortgage payments. It is possible, and common among higher-rate taxpayers with mortgaged portfolios, to show a taxable rental profit while simultaneously running a negative monthly cashflow once tax is accounted for.

The property allowance

The first £1,000 of gross rental income each tax year is covered by the property allowance and is tax-free without the need to report expenses. If gross rental income exceeds £1,000, the landlord must either use the property allowance (taking a £1,000 flat deduction) or deduct actual allowable expenses, whichever produces the better outcome. The two cannot be combined in the same tax year.

What counts as an allowable expense

HMRC's Property Income Manual sets the rule: an expense is allowable if it is incurred wholly and exclusively for the purposes of the property business and is not capital in nature. In practice, allowable expenses for most residential landlords include letting agent and management fees, landlord insurance, ground rent and service charges, the cost of repairs and maintenance that restore something to its previous condition, safety certificate costs (gas, EICR, EPC), accountancy fees, and other professional fees directly related to the letting.

Capital improvements - works that add something new or materially enhance the property beyond its original condition, are not deductible as revenue expenses. They may attract relief against capital gains tax on eventual disposal, but they do not reduce rental profit in the year the work is carried out. The repair-versus-improvement boundary is the most common area of HMRC scrutiny in a landlord tax enquiry. For the full list of allowable expense categories and how to handle the boundary correctly, see our rental property expense categorisation guide.

August's expenses tracking feature records every allowable cost against the correct HMRC category as you go, so your profit figure is always current and your records are ready for Making Tax Digital submissions.

Section 24 and the mortgage interest restriction

The most significant tax factor for individual landlords with mortgaged residential property is Section 24 of the Finance (No. 2) Act 2015. Before April 2020, mortgage interest was deducted from rental income to arrive at taxable profit, just as any other business expense would be. From April 2020, that treatment was abolished for individual landlords. Instead, the full rental income (before mortgage interest deduction) counts as taxable profit, and the landlord then receives a basic-rate (20%) tax credit on the qualifying finance costs.

The practical effect can be significant. A landlord with £20,000 gross rent, £5,000 other expenses, and £12,000 mortgage interest now has a taxable profit of £15,000 (£20,000 minus £5,000), not £3,000 as it would have been under the old rules. They then receive a £2,400 tax credit (20% × £12,000). For a basic-rate taxpayer, the net tax position may be similar to the old regime. For a higher-rate taxpayer, the taxable profit figure of £15,000 may push them into the higher band or increase the tax owed substantially.

Section 24 does not apply to companies. Landlords who hold property through a limited company pay corporation tax on profits and can deduct mortgage interest in full as a business expense, one reason many portfolio landlords with higher-rate tax positions have incorporated in recent years. The rental income tax calculator on August models the Section 24 effect correctly for different taxpayer profiles and ownership structures.

Loss relief

If allowable expenses exceed rental income in a tax year, the result is a rental loss. Unlike trading losses, rental losses for an individual cannot be set against other income (salary, self-employment, investment income) in the same year. Instead, they are carried forward and set against future rental profits from the same property business. A portfolio landlord whose total rental income falls below total costs in a given year, through a combination of void periods, exceptional repair costs, or compliance expenditure, accumulates losses that reduce future taxable profit.

Making Tax Digital and rental profit reporting

From 6 April 2026, landlords with gross rental and/or self-employment income above £50,000 must report rental profit to HMRC quarterly under Making Tax Digital for Income Tax Self Assessment, using MTD-compatible software rather than the HMRC website. Quarterly updates are summaries of income and expenses for each quarter; the annual profit calculation is confirmed in a final end-of-year declaration. The threshold drops to £30,000 from April 2027 and to £20,000 from April 2028, bringing the majority of landlords into scope over the next two years.

From working with self-managing landlords across the UK, we find that the landlords who struggle most with MTD are those who have been reconciling their rental income and expenses annually from bank statements and paper receipts. The quarterly discipline of MTD is actually easier when records are maintained digitally in real time, the submission becomes a review of what is already there, rather than a retrospective reconstruction.

The Renters' Rights Act and rental profit margins

From 1 May 2026, the Renters' Rights Act changes the operating backdrop for rental profit in three ways that matter to margin management. Rent increases are limited to once per year under a Section 13 notice procedure, which standardises when and how income can grow. Section 21 no-fault evictions are abolished, meaning possession disputes are slower and more costly when they arise, a direct hit to profit if void periods lengthen during contested proceedings. The incoming Private Rented Sector Ombudsman and Decent Homes Standard add regulatory costs over the medium term. All of these make the maintenance, arrears management, and documentation habits that protect against disputes and enforce possession efficiently into genuine profit protection measures rather than administrative overhead.

For a full guide to how rental profit is taxed, including income tax rates, the Section 24 worked example, and the limited company comparison, see our guide to how rental income is taxed in the UK.

Frequently asked questions

What is the difference between rental profit and rental income? 

Rental income is the gross rent received from tenants before any deductions. Rental profit is the taxable figure, rental income minus allowable expenses, that HMRC assesses for income tax purposes. You pay income tax on profit, not on gross income. If your allowable expenses (insurance, repairs, agent fees, compliance costs) exceed your rental income in a tax year, you make a rental loss, which is carried forward against future profits rather than set against other income.

How much tax do I pay on rental profit? 

Rental profit is added to your other income and taxed at your marginal income tax rate: 20% (basic rate), 40% (higher rate), or 45% (additional rate). There is no separate "landlord tax", the rate depends on where the rental profit falls across your total taxable income from all sources. Higher-rate taxpayers with mortgaged properties should note that the Section 24 restriction typically increases the taxable profit figure above the actual cashflow surplus, which can push marginal income into the higher band even where the monthly cashflow is modest.

Can I offset rental property losses against other income? 

No, for most individual landlords. Rental losses from a UK property business cannot be offset against employment income, self-employment profits, or other taxable income in the same year. They are carried forward and set against future rental profits from the same property business. There is no time limit on carrying forward rental losses. If you operate through a company, different rules apply and you should take professional advice.