If you’re a landlord in the UK, you may be wondering, do I pay tax on rental income if I have a mortgage? The short answer is yes. While it may not be the answer you were looking for, having a mortgage on your rental property does not make you exempt from paying tax on the income you generate from rent. However, there are specific rules and allowances that can reduce the amount of tax you owe.
This blog will break down the key points about how rental income is taxed in the UK, what deductions are available, and give you tips on how to optimise your tax position from the experts at Kirkwood Wilson.
What is Income Tax?
In the UK, rental income is subject to income tax. This means that the profits you earn from renting out a property are added to your other income for the tax year. The exact rate of tax you pay will depend on your total income and which income tax band you fall into.
For the 2023/24 tax year, the income tax rates are as follows:
- Basic rate (20%): £12,571 to £50,270
- Higher rate (40%): £50,271 to £125,140
- Additional rate (45%): Over £125,140
If your rental income pushes you into a higher tax band, you could find yourself paying more tax than expected. It’s important to plan carefully and claim all allowable expenses to minimise your tax liability. Working with a chartered accountant, such as our expert team, can be invaluable for understanding how much tax you owe and ensuring you remain compliant.
Calculating Your Taxable Rental Income
To calculate how much tax you’ll pay on your rental income, you first need to determine your taxable profit. This is done by subtracting allowable expenses from your total rental income. Allowable expenses can include costs incurred for maintaining and running the property, such as:
- Letting agent fees
- Property maintenance and repairs
- Insurance
- Ground rent and service charges
- Council tax (if you pay it as a landlord)
However, while mortgage interest used to be a significant deductible expense, the rules around this have now changed.
Mortgage Interest Relief: What’s Changed?
Prior to April 2020, landlords could deduct all mortgage interest payments from their rental income when calculating taxable profit. This often significantly reduced their tax bills.
However, under new rules introduced by the UK government:
- Mortgage interest relief has been replaced with a 20% tax credit.
- You can no longer deduct the full mortgage interest as an expense if you are a higher or additional rate taxpayer. Instead, you’ll only receive a tax credit equivalent to the basic rate of income tax (20%).
This change has had a significant financial impact on many landlords, particularly those with buy-to-let properties and high mortgage interest payments.
Do I Pay Tax on Rental Income If I Have a Mortgage?
Yes, even if you have a mortgage, you are still required to pay tax on your rental income. As explained above, the profits you earn are subject to income tax. However, the ability to offset some of the mortgage interest through the 20% tax credit can help reduce your overall tax burden.
It’s important to note that the amount of tax is different for everyone and you pay will depend on:
- Your total rental income.
- Your allowable expenses.
- The portion of your mortgage interest eligible for the 20% tax credit.
- Your personal tax band.
Given the complexities, consulting with a professional in tax planning is recommended to ensure you are managing your obligations efficiently.
When Do I Pay Tax on Rental Income?
Tax on rental income is typically paid as part of your annual self-assessment tax return. Key deadlines to keep in mind include:
- 5th October: You must register for self-assessment if you are a new landlord.
- 31st January: The deadline to file your tax return and pay any tax owed for the previous tax year.
If your rental income exceeds £10,000, you may need to make payments on account, which are advance payments towards your next year’s tax bill.
Our Top Tips to Pay Less Tax on Rental Income
Of course, you don’t want to be paying more tax on your rental income than you have to. Therefore, to ensure you’re not paying unnecessary, here are some of the top tips and strategies from our tax experts:
- Claim all allowable expenses – Make sure you keep detailed records of all property-related expenses. Anything from repairs to letting agent fees can reduce your taxable profit. Even small expenses can soon add up and make a dent in your tax bill so be sure to keep your records detailed and up to date. You may even consider our bookkeeping services to make this easier.
- Use the 20% mortgage tax credit effectively – Although you can’t deduct all your mortgage interest, ensure you claim the basic rate tax credit for the allowable portion.
- Transfer ownership strategically – If you own a property with a partner, transferring ownership to the person in the lower tax band can reduce the overall tax owed.
- Incorporate your property portfolio – Some landlords choose to run their rental business as a limited company, as corporate tax rates are often lower than personal tax rates. However, this strategy has its own complexities and costs that you will need further advice on.
- Work with a professional – Partnering with a chartered accountant, such as our team at Kirkwood WIlson, ensures that you’re taking full advantage of allowances and reliefs while staying compliant with tax regulations. This helps you save where possible and also gives you peace of mind that you won’t get in trouble with the tax man later down the line.
If you’re unsure about your obligations or need help navigating the complexities of rental income tax, seeking professional advice is a smart move. At Kirkwood Wilson, we’re here to help with efficient tax planning, so you can manage your rental income effectively, avoid overpaying. make sense of the numbers and keep your finances in order.
