Rental income is property income for tax purposes — it is added to all your other income (employment salary, pensions, dividends, savings interest) and taxed at your marginal rate. The rates are 20% (basic), 40% (higher), or 45% (additional) depending on your total taxable income.
Section 24, which phased in from 2017 and was fully effective from April 2020, changed the rules for deducting finance costs. This single change has caused the largest increase in landlord tax bills since the buy-to-let sector emerged. Understanding the interaction between Section 24, allowable expenses, and your marginal tax rate is essential for accurate tax planning.
How rental income is taxed
Rental income is assessed as property income and taxed at marginal income tax rates:
- All rental income from UK properties is pooled into a single 'UK property income' calculation
- Deduct allowable expenses from gross rental income — the result is your taxable rental profit
- The taxable rental profit is added to all other income for the year to determine your marginal tax rate
- Tax rates 2025/26: basic rate 20% (income £12,571–£50,270), higher rate 40% (£50,271–£125,140), additional rate 45% (above £125,140)
- Personal allowance: £12,570 of total income is tax-free. If you are a basic rate employed taxpayer with £30,000 salary and £10,000 rental profit, your total income is £40,000 — all within the basic rate band
- Rental losses: if your rental expenses exceed rental income in a tax year (e.g. due to a void period or major repair), the loss is carried forward and set against future rental profits — it cannot usually be set against other income
Section 24 — the mortgage interest restriction explained
Section 24 affects every individual landlord with a buy-to-let mortgage:
- Since April 2020, individual landlords cannot deduct mortgage interest, loan interest, or arrangement fees from rental income as a business expense
- Instead, they receive a tax credit equal to 20% of their total finance costs
- Example: £10,000 of mortgage interest per year. Higher rate taxpayer: previously deducted £10,000 from rental profit, saving £4,000 tax (40%). Now receives 20% credit = £2,000 saving. Net tax increase: £2,000 per year
- Basic rate taxpayers: where all rental income plus other income remains within the basic rate band, Section 24 has no net effect — the credit equals what the deduction would have saved
- The impact is greatest on higher rate taxpayers — particularly those whose rental income pushes them from the basic into the higher rate band (the 'fiscal drag' effect)
- Section 24 applies to individuals, partnerships, and LLPs. It does NOT apply to limited companies — mortgage interest remains fully deductible for company landlords
Allowable rental expenses
These expenses reduce your taxable rental profit (before Section 24 adjustment):
- Fully deductible: Letting agent fees, property management fees, advertising and tenant-find costs, accountancy fees for rental accounts, landlord insurance premiums, ground rent and service charges (leasehold properties), council tax during void periods paid by the landlord, utility bills paid by the landlord, repairs and maintenance (like-for-like replacement only)
- Restricted to 20% tax credit: All finance costs — mortgage interest, loan interest, arrangement fees, redemption penalties
- Capital expenditure (not deductible from rental income): Extensions, loft conversions, new bathrooms/kitchens that upgrade rather than replace like-for-like. These are allowable for CGT purposes when you sell
- Replacement of domestic items relief: The cost of replacing furnishings on a like-for-like basis is deductible (e.g. replacing a broken washing machine with a comparable model). The original purchase of furnishings for an unfurnished property is not deductible
- Keep all receipts and invoices — HMRC may request evidence in a compliance review
Self-assessment obligations — deadlines and thresholds
Most landlords must file a UK self-assessment tax return each year:
- Register for self-assessment with HMRC if: gross rental income exceeds £10,000, or rental profit (after expenses) exceeds £2,500
- Property Income Allowance: if gross rental income is £1,000 or less, you are completely exempt — no reporting or tax. Above £1,000, you must assess your position
- Registration deadline: register by 5 October following the end of the tax year in which you first received rental income. E.g. if you started letting in June 2025, register by 5 October 2026
- Filing and payment deadlines: 31 January — online self-assessment return for previous tax year AND first payment on account. 31 July — second payment on account
- Payments on account: HMRC requires advance payments towards the following year's tax bill (based on the previous year) — budget for this to avoid cash flow surprises
- Penalties for late filing: £100 immediately (one day late), £10/day for up to 90 days, then further penalties. Interest accrues on unpaid tax from 31 January
Should I use a limited company instead?
The SPV question requires careful personal analysis — it is not automatically advantageous:
- Tax advantage: A limited company pays Corporation Tax (19–25%) on rental profits, not income tax. Mortgage interest is fully deductible — Section 24 does not apply. This is the primary tax advantage
- Tax disadvantage: Extracting money from the company (salary or dividends) triggers additional income tax. The combined corporate + personal tax can exceed the rate for a basic rate taxpayer — the advantage is clearest for higher rate taxpayers who can retain profits in the company
- Mortgage cost: SPV BTL mortgages are sometimes slightly more expensive than personal BTL products — though the gap has narrowed. Factor in any rate premium in your analysis
- Existing properties: Transferring personally held properties into a company triggers SDLT (on market value) and potentially CGT — the upfront cost is prohibitive for most established landlords
- New purchases: Buying future properties in an SPV from the outset is the most tax-efficient approach for higher rate taxpayers with significant finance costs
- Take advice from a specialist property tax adviser before making structural changes — the interaction with CGT, Inheritance Tax, and pension planning affects the optimal decision
Frequently asked questions
What is the property income allowance and how do I claim it?+
The Property Income Allowance is a £1,000 annual allowance on gross rental income. If your total gross rental income (before any expenses) is £1,000 or less, you do not need to report it to HMRC or pay any tax. If it exceeds £1,000, you have two options: (1) claim the allowance and pay tax on the gross income minus £1,000; or (2) deduct your actual allowable expenses (which is almost always more beneficial if your expenses exceed £1,000). The allowance cannot be used alongside actual expense deductions — it is one or the other. The allowance is claimed on your self-assessment return.
My only income is rental income — do I still pay income tax?+
Yes — rental income is taxable like any other income. Your personal allowance (£12,570 in 2025/26) shelters that amount of rental profit from tax. On rental profit above £12,570, you pay 20% basic rate tax. If rental profit plus any other income exceeds £50,270, you enter the higher rate band and pay 40% on the excess. The Section 24 mortgage interest restriction applies in the same way — you receive a 20% credit on finance costs rather than a deduction, and the impact depends on your marginal rate.
Can I deduct expenses from before the tenancy started (pre-letting expenses)?+
Pre-letting expenses incurred in the 7 years before the first letting are allowable if: they would have been deductible if incurred during the letting, and the property was available for letting in the tax year the deduction is claimed. Common allowable pre-letting expenses include: repairing a property before letting to make it habitable, advertising costs, and professional fees for setting up the rental business. Capital expenditure before letting (improvements, extensions) is still capital — allowable for CGT on disposal, not against rental income.
What records do I need to keep for my rental income tax return?+
Keep: bank statements showing rental income credited monthly for each property; invoices and receipts for all deductible expenses (repairs, insurance, agent fees, utilities); mortgage statements showing interest paid each year; copies of all tenancy agreements; records of void periods; details of any deposit scheme deductions; and records of any capital expenditure (for CGT purposes when you eventually sell). HMRC can investigate rental income up to 4 years after the end of the relevant tax year (or 6 years for careless errors, 20 years for deliberate non-disclosure). Retain records for at least 6 years after the last relevant tax return.