Rental income is taxable, and the rules governing how landlords are taxed have changed significantly over the past decade. Many landlords are paying more tax than they realise — and some are under-claiming allowable expenses that would reduce their bill. This guide explains the current position plainly.
How Rental Income Is Taxed
Rental income from UK residential and commercial properties is treated as income for income tax purposes. You report it on your Self Assessment tax return and pay tax on your net rental profit — that is, your rental income after allowable expenses.
The rates are the same as income tax bands:
| Taxable Income | Rate |
|---|---|
| Up to £12,570 (personal allowance) | 0% |
| £12,571 – £50,270 | 20% |
| £50,271 – £125,140 | 40% |
| Above £125,140 | 45% |
Your rental profit is added to any other income you have — salary, dividends, pension — before calculating which tax band applies. If your salary already takes you into the higher rate band, your rental profit will be taxed at 40%.
Section 24: The Mortgage Interest Restriction
Section 24 of the Finance Act 2015 — now fully in effect — is one of the most significant changes to landlord taxation. Before it was introduced, landlords could deduct mortgage interest payments in full from their rental income, reducing their taxable profit directly.
Under the current rules, mortgage interest is no longer a deductible expense. Instead, you receive a tax credit of 20% of your mortgage interest costs, applied against your tax bill rather than your income.
For a basic rate taxpayer, the 20% tax credit produces the same result as the old deduction. For a higher rate taxpayer, the old system gave 40% relief on mortgage interest; the current system gives only 20% — effectively doubling the tax cost of mortgage interest for those in the higher rate band.
Worked Example
Landlord with rental income £20,000, mortgage interest £8,000, and other allowable expenses £2,000. Total other income (salary): £40,000.
- Rental profit before mortgage interest: £18,000 (income £20,000 less expenses £2,000)
- Taxable rental profit: £18,000 (mortgage interest is no longer deducted)
- Total taxable income: £40,000 + £18,000 = £58,000 — pushes landlord into higher rate band
- Tax on rental profit at 40%: £7,200
- Less 20% tax credit on mortgage interest: £1,600 (20% × £8,000)
- Net tax on rental income: £5,600
Without Section 24, the same landlord would have deducted £8,000 mortgage interest, leaving taxable rental profit of £10,000 — a significantly better outcome.
Allowable Expenses for Landlords
While mortgage interest is restricted, most other property expenses remain fully deductible:
- Letting agent fees and management charges
- Buildings and contents insurance
- Repairs and maintenance (not improvements — see below)
- Ground rent and service charges (leasehold properties)
- Council tax, utilities (where paid by landlord)
- Accountancy fees relating to your property income
- Advertising costs for finding tenants
- Legal fees for new tenancy agreements (not for property purchase)
Repairs vs improvements: Replacing a broken boiler with a like-for-like replacement is a repair — deductible in full. Replacing a basic boiler with a high-efficiency system with additional features may be partly or fully treated as an improvement — a capital cost claimed through capital allowances, not as a direct expense.
The Property Income Allowance
If your gross rental income is £1,000 or less in a tax year, it is exempt from tax entirely under the property income allowance. You do not need to declare it. If your rental income exceeds £1,000, you can choose between deducting actual expenses or simply deducting the £1,000 allowance — use whichever gives the better result.
Capital Gains Tax on Disposal
When you sell a rental property, any gain (the difference between your sale price and your purchase price, adjusted for allowable costs) is subject to Capital Gains Tax. For residential property sold after 6 April 2024:
| Taxpayer | CGT Rate on Residential Property |
|---|---|
| Basic rate taxpayer | 18% |
| Higher or additional rate taxpayer | 24% |
You also have an annual CGT exemption of £3,000 (2025/26). Any gain within this amount is tax-free.
You must report and pay CGT on UK residential property sales within 60 days of completion — you cannot wait until your Self Assessment return.
Stamp Duty Land Tax: The Surcharge for Additional Properties
If you own more than one residential property, a 5% SDLT surcharge applies to any additional residential property purchase (increased from 3% in October 2024). This applies even to properties worth less than the standard SDLT threshold.
Planning Your Tax Position: Practical Steps
- Keep accurate records of all income and expenses throughout the year — do not rely on memory at Self Assessment time
- Retain all receipts for repairs, maintenance, and professional services
- Review your mortgage structure — interest-only mortgages create a higher Section 24 exposure than repayment mortgages
- Consider whether operating through a limited company makes sense for your portfolio — the rules are different, and for larger portfolios the maths can favour incorporation
- File and pay on time — the 60-day CGT reporting rule is frequently missed and penalties apply from day 61
See HMRC's guidance on rental income and reporting capital gains on property.
General information only. This article provides general guidance on UK tax and accounting matters and reflects our understanding of legislation and HMRC guidance at the time of publication. Tax rules, rates, and thresholds change frequently. Nothing in this article constitutes personalised tax or financial advice. Always seek advice specific to your circumstances from a qualified accountant before taking action. Ledgertech Accountants Ltd accepts no liability for any loss arising from reliance on this content.
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