Do you have to pay income tax on rental property?

There are countless things to consider as a landlord. And with the rental market ever-changing with updated policies, it can sometimes be difficult to keep up. It’s without a doubt that one of the main priorities for landlords is to keep any finances in check. Particularly when it comes to taxes. Here we’ll cover everything you need to know about landlord income tax to answer the question of do you have to pay income tax on rental property?

Do landlords pay National Insurance?

Yes, as a landlord you do have to pay Class 2 National Insurance if your profits are £6,515 or more per annum. As well as this, there are extra conditions to meet to pay National Insurance. For example, being a landlord must be your main job; you have to rent out more than one property and you must be buying new properties to rent out. 

Whereas if your profits don’t reach £6,515, you can still make voluntary National Insurance contributions. You may want to consider this if a full State Pension is important to you.

For property that you personally own, the first £1,000 of income from your rental property is tax-free. This is called your property allowance. In the situation where your income from property rental is between £1,000 and £2,5000 a year, please contact HMRC to file a self assessment tax return. Please note that it’s a requirement that you report your income on this self assessment tax return if your income is:

  • £2,500 to £9,999 after allowable expenses
  • £10,000 or more before allowable expenses

How much tax do landlords pay on rent?

As a landlord with multiple properties, you will need to pay tax on your net rental income. Net rental income is calculated by subtracting ‘allowable expenses’ from your total rental income. Following this, HMRC will then determine how much tax you should pay.

There is no blanket figure for the amount of tax that every landlord must pay. Every landlord’s tax position will be different however they can normally be categorised into one of three circumstances:

  • You don’t earn enough from your rental property to need to pay tax 
  • You pay income tax on your rental property at a rate of 20%
  • You pay income tax on your rental property at a rate of 40% or more

Allowable expenses for landlords

As a landlord, allowable expenses are a great way to reduce your tax bill. Allowable expenses permit you to claim the costs of running and maintaining your property. We’ve compiled a list of some of the main allowable expenses for landlords:

  • Ground rent 
  • Utility bills such as electricity, gas and water 
  • Council tax 
  • Professional fees which include legal expenses, agent fees and accountant costs
  • Landlord insurance and landlord contents insurance
  • Mortgage and property loan interest
  • Property maintenance and repairs - includes the costs of any cleaners/gardeners
  • Any other associated costs of renting your property such as making phone calls, stationery and advertising

Please be aware that allowable expenses don’t cover things like buying a property or renovating it beyond small areas of wear and tear. These types of expenses are called capital expenditure.

Replacement of domestic items relief

Replacement of domestic items relief means that you can claim tax relief on the money spent on replacing a number of domestic items. Domestic items that are eligible for this relief include:

  • Appliances like fridges and freezers
  • Furniture like beds and sofas
  • Carpets 
  • Curtains 
  • Kitchenware such as crockery and cutlery
  • TVs

To benefit from the relief, there are a couple of conditions to meet. For example, the domestic item must only be used by the tenants in your residential property and the item you replaced can no longer be in use at that property.

Paying tax when you sell a rental property

When it comes to selling your rental property, you will need to pay Capital Gains Tax. If you’re a basic-rate taxpayer, this will be charged at a rate of 18%. Whereas if you fall into the category of a higher or additional-rate taxpayer, Capital Gains Tax increases to 28%. It’s critical that you pay this tax within 30 days of the sale of your rental property.

We at CIA Landlords are here to give you the best advice when it comes to renting out your property. If you’d like to read more tax advice for landlords, visit our advice centre where you can learn more about landlord finances.