Rental income is a type of income that you can earn from renting out a property. It’s important to understand how rental income is taxed, and we’ll walk you through the steps of calculating your taxable profit at the end of this article.
What is rental income?
Rental income, on the other hand, is the money you receive from renting out a property. It’s not to be confused with capital gains tax or corporation tax—those are completely separate things.
What are the tax rules in the United Kingdom?
The tax rules in the United Kingdom are simple: all rental income is taxable, and you pay 20% tax on it. However, if your rental income is more than £40,000 per year (roughly $54,000), the amount above £40K will be taxed at 40%. So if you earn £50K from renting out your home and have no other sources of income or savings, you’ll owe 20% on everything up to £40K plus 40% on anything above that figure.
The reverse is true too—if your total annual rental income falls below this threshold—as long as it’s not negative and goes up each year—you’ll only pay 20% on everything.
What expenses can you include in my buy to let income tax calculation?
- Mortgage interest. This is the main expense to include in your rental income tax calculation. You can also deduct any fees and costs you incur in order to obtain a mortgage or other loans, such as legal fees and other expenses relating to the sale or purchase of an investment property. You can always use a buy to let income tax calculator make things easier such as the one from Commercial Trust.
- Property taxes. You can claim these if they’re included on your rent bill and paid by you directly, or if they were paid through an escrow account set up with a third party (for example, your mortgage lender). If you have any other bills related to the maintenance of the property (such as water bills), these are also deductible from your taxable income for that year.
- Maintenance and repairs: If there’s anything that needs fixing around the house (or just replacing), this could be written off against rental income! Just make sure it was for something beyond normal wear-and-tear before claiming it back—if there was no further damage done, then no problem!
How do I calculate the taxable profit?
How do I calculate the taxable profit?
- Deductible expenses: These are costs that you can deduct from your income when calculating your taxable profits. For example, if you own a car, the wear and tear on it reduce the amount of money you have to pay in tax.
- Capital allowances: If your rental property has an additional cost because of its age or location, this may count as a capital allowance. These allowances can be claimed over many years rather than all added up at once at the end of each year, so they’re not subject to income tax during that time period.
- Depreciation: This applies when an asset like a rental property loses value over time due to wear and tear or obsolescence (when it becomes technologically outmoded). Depreciation allows us to spread these losses against profits from other sources so that our overall tax bill isn’t too high
This article has discussed all the main aspects of how rental income is taxed in the UK. We hope that by now, you have a better understanding of what your rights are as a landlord and how you can best manage your tax affairs going forwards.
