Rental income tax for landlords

Rental income has no special flat rate

Rental profit is simply added to your other income — salary, self-employment profit, pensions — and taxed through the same Personal Allowance and Income Tax bands as everything else. There's no separate 'landlord tax rate'; a landlord with no other income pays the same 20%/40%/45% bands as anyone else, while a landlord who's also a higher-rate taxpayer from their main job pays 40% on their rental profit too.

What counts as an allowable expense

Allowable expenses are the day-to-day costs of running the letting: letting agent fees, buildings and contents insurance, ground rent and service charges, repairs and maintenance (like-for-like replacements, not upgrades), utility bills if the landlord pays them, and accountancy fees. These come off rental income before tax is worked out.

Capital improvements — genuinely upgrading the property rather than maintaining it, like adding an extension or replacing a basic kitchen with a much higher-specification one — aren't deductible as a running expense. Instead, they reduce the taxable gain when the property is eventually sold, which is where Capital Gains Tax comes in.

The mortgage interest restriction — the single biggest change for landlords

Since April 2020, landlords with a mortgage on a residential rental property can no longer deduct mortgage interest from rental income before working out tax. Instead, the interest is left out of the expense calculation entirely, and a 20% tax credit is applied against the final tax bill instead. For a basic-rate taxpayer this makes little practical difference, but for a higher-rate taxpayer it genuinely increases the tax owed compared with the old system, because the credit is capped at 20% even though their marginal rate is 40% or 45%.

A worked example: £12,000 rent, £9,000 mortgage interest

Take a higher-rate taxpayer landlord with £12,000 of annual rent, £1,500 of other allowable expenses, and £9,000 of mortgage interest. Under the current rules, taxable rental profit is £12,000 − £1,500 = £10,500 (mortgage interest isn't deducted here at all). At their 40% marginal rate, that's £4,200 of Income Tax, minus a 20% tax credit on the £9,000 of mortgage interest (£1,800), for a net rental tax bill of £2,400.

Compare that with how it would have worked under the pre-2020 rules, where mortgage interest was simply deducted like any other expense: taxable profit would have been £12,000 − £1,500 − £9,000 = £1,500, taxed at 40% for a bill of just £600. Same cash profit, same property, same mortgage — but £1,800 more tax under the current rules, purely because of how the relief is structured for a higher-rate taxpayer.

Smaller-scale alternatives

Two reliefs are worth knowing for smaller lettings. Rent-a-room relief lets you earn up to £7,500 a year tax-free from letting a room in your own main home. The property income allowance separately lets anyone with small amounts of property income claim a flat £1,000 tax-free allowance instead of deducting actual expenses — useful if your genuine expenses are low, but you can't claim both the allowance and your real expenses on the same income at once.

Furnished holiday lettings used to be different — that's changing

Furnished holiday lettings have historically had their own, more generous tax treatment, including full mortgage interest deductibility and access to certain Capital Gains Tax reliefs not available to ordinary residential lets. These rules have been under reform, with the special furnished holiday letting regime being phased out so that this type of letting is taxed more like any other residential rental business. Anyone running a holiday letting business should check the current position carefully, since the gap between the old and new treatment is significant.

Common mistakes

• Deducting mortgage capital repayments as an expense — only the interest portion of a mortgage payment was ever allowable, and since 2020 even that no longer comes off rental income directly, just via the 20% tax credit.
• Treating a property upgrade as a revenue expense — a genuine capital improvement reduces a future Capital Gains Tax bill on sale, not this year's rental Income Tax.
• Assuming the mortgage interest restriction doesn't affect basic-rate taxpayers at all — it generally doesn't change their tax bill much, but it can still push a basic-rate landlord into higher-rate territory, since the gross rental profit (before the interest credit) counts towards their income for band purposes.
• Forgetting the property income allowance and actual expenses can't both be claimed on the same income — it's one or the other, whichever gives the better result for your specific numbers.
• Not accounting for rental profit pushing total income over £100,000 or £60,000 — the same Personal Allowance taper and Child Benefit charge thresholds apply, based on total income including rental profit.