Understanding Tax on Rental Income: What Every Landlord Should Know

Just like any other form of income, rental income is taxable and understanding how it works can help landlords stay compliant and maximise returns.

The tax rules around buy-to-let have changed in recent years, particularly around mortgage relief, and it’s caught many investors by surprise. Here’s a clear breakdown of what’s taxable, what’s deductible, and how to keep things running smoothly whether you own one property or an entire portfolio.

What Is Rental Income Tax?

Put simply, rental income tax is income tax paid on the money you earn from tenants. The same tax bands apply as they do for employment or pension income:

• 20% for basic-rate taxpayers

• 40% for higher-rate taxpayers

• 45% for additional-rate taxpayers

The more you earn, the higher the rate that applies. Rental income is added to your other sources of income to determine your total tax bracket.

How It’s Calculated

You’ll be taxed on your profits that’s your total rental income minus allowable expenses and any tax-free allowances.

If you own your rental properties personally, you’ll report your income through a self-assessment tax return, typically once a year.

It’s worth noting that the rules changed a few years ago around mortgage interest. Landlords can no longer deduct full mortgage interest costs from their rental income. Instead, they receive a 20% tax credit on mortgage interest payments, a rule that particularly affects higher-rate taxpayers.

Example:If you earn £35,000 from your job and £20,000 in rent, part of your rental profit may be taxed at 40%, because the rental income pushes you into the higher tax band.

Managing Multiple Properties

If you have more than one rental property, HMRC treats them as part of a single rental business. You’ll combine all profits and losses before calculating your total taxable income.

For example, if one flat makes £10,000 profit and another loses £3,000, you’ll only pay tax on the £7,000 difference.

Keeping clear, separate records for each property from utility bills to repairs makes life much easier when it comes time to file your return.

Overseas Rentals

If you own property abroad, the income is still taxable in the UK, even if you’ve already paid tax in that country.

Fortunately, the UK has double taxation agreements with many nations, meaning you won’t usually be taxed twice but you will need to declare the income and apply for relief where applicable.

In these cases, it’s sensible to get professional advice, as international tax rules can be complex.

Allowable Expenses and Tax-Free Allowances

Allowable Expenses

You can deduct costs that are “wholly and exclusively” for the purpose of renting your property. These include:

• Utility bills

• Repairs and maintenance

• Service charges

• Letting agent fees

• Landlord insurance

Good record-keeping is essential, every receipt helps reduce your taxable profit.

Allowances

There are also a few useful allowances:

• Property allowance: Up to £1,000 of rental income tax-free per year.

• Rent-a-Room scheme: Up to £7,500 tax-free if you rent out a furnished room in your own home.

Deadlines to Remember

For the 2024–25 tax year:

• 31 October 2025: Paper tax return deadline

• 30 December 2025: Online submission if you want HMRC to adjust PAYE code (under £3,000 owed)

• 31 January 2026: Online tax return and payment deadline

• 31 July 2026: Second payment on account for 2025–26

Missing these can lead to penalties so mark the dates in your calendar.

Mortgage Interest and Tax Relief

Even if you have a mortgage, you still pay tax on your rental income.

Previously, landlords could offset all mortgage interest against rental income, but now only a 20% credit applies. For higher-rate taxpayers, this means the relief is reduced.

In some cases, landlords may even make a loss on paper yet still owe tax another reason why careful planning matters.

Do You Pay Tax if It’s Your Only Income?

Yes, rental income is taxable even if it’s your only source of earnings.

However, if your total income (including rent) is below the personal allowance of £12,570 (frozen until April 2028), you won’t owe tax. You’ll still need to declare it to HMRC, though, to stay compliant.

Final Thoughts

The rules on rental income tax have tightened especially around mortgage relief but with the right planning, you can still make property investment work smartly for you.

Whether you’re managing one flat in Chelsea or a portfolio across London, understanding how your rental income is taxed helps you make informed decisions, avoid penalties, and protect your profits.

At Smith & Ericsson, we work closely with clients to provide property insight that goes beyond the sale — helping landlords, investors, and homeowners stay one step ahead in a shifting market.