Income Tax on Rental Income
Rental income is added to your other income and taxed at your marginal rate. If you're a higher-rate taxpayer, you'll pay 40% tax on your rental profits.
Allowable Expenses
You can deduct certain costs from your rental income before calculating tax. This reduces your taxable profit.
Tax-deductible expenses include:
- Letting agent fees
- Property maintenance and repairs (not improvements)
- Insurance (landlord, building, contents)
- Accountancy fees
- Ground rent and service charges
- Council tax and utilities (if you pay them)
- Advertising for tenants
Mortgage Interest Changes
Since April 2020, landlords can no longer deduct mortgage interest as an expense. Instead, you get a tax credit at the basic rate (20%) regardless of your tax bracket.
Example: If you pay £10,000 in mortgage interest and you're a 40% taxpayer, you used to save £4,000 in tax. Now you only get a £2,000 tax credit (20% of £10,000). That's £2,000 extra tax per year!
These mortgage interest changes hit higher-rate taxpayers hardest and made limited company ownership more attractive for many landlords.
Capital Gains Tax (CGT)
When you sell a BTL property, you'll pay CGT on any profit. The rates are 18% for basic rate taxpayers and 24% for higher rate taxpayers (after using your annual allowance).
Limited Company Tax Treatment
If you own property through a limited company, the tax treatment is different. The company pays corporation tax (25%) on profits, and you pay tax when extracting money as salary or dividends.
The best ownership structure depends on your personal circumstances. We recommend speaking to a tax adviser before deciding whether to buy personally or through a company.