When do I pay tax on my rental income?

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You pay tax on the rental profits you make in each tax year. The tax year runs from 6th April to 5th April the following year. You must file your self-assessment tax returns and pay your bill to HMRC by the 31st of January following the end of the tax year.
 
For example, for rental income earned between 6th April 2022 and 5th April 2023, you must file and pay your tax returns by 31st January 2024.

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As a landlord, you must pay tax on the money you make from renting out your properties.

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What taxes do landlords pay?

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If you are considering becoming a landlord or are new to being a landlord, you may still be familiarising yourself with the many processes and responsibilities you need to follow.  

Making sure you pay the correct amount of tax is one of the essential legal requirements that you must comply with to avoid potential fines.

Landlords are required to pay:

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• Income tax on profit from renting out residential property. 

• Class 2 national insurance if profits are £12,570 a year or more and what you do counts as running a business. 

• Capital gains tax if you sell an investment property.

• Council tax if your property is empty.

 

If you set up your property business as a limited company, your tax requirements differ from if you personally own the property.

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What counts as rental income for landlords?

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Rental income is primarily the money you receive from your tenants in rent but can include charges for additional services you provide, including:

• Cleaning

• Hot water

• Heating

• Repairs

 

You must also include any money retained from your tenant's deposit at the end of the tenancy.

You must declare your rental income in the tax year it is due, even if you're not paid until the next tax year.

Allowable expenses

You can deduct allowable expenses you incur from your rental income to calculate your taxable rental profit if they are wholly and exclusively for your property business.

Examples of allowable expenses include:

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General maintenance and repairs to the property, but not improvements

• Bill such as water rates, council tax, gas, and electricity.

• Landlord insurance.

• Letting agent's fees.

• Accountant's fees.

• Service charges and ground rents.

• Phone calls, stationery, and advertising.

• Legal fees (related to tenant eviction, not for buying property)

 

You should declare any allowable expenses in the tax year the work was done, even if you don't pay the bill until the next tax year.

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Property allowance

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The first £1,000 of your rental business income is tax-free; this is your personal property allowance. For joint owners, both parties can claim the allowance, i.e. £1,000 each against their share of the gross rental income.  
 
However, if you claim property income allowance, you are not allowed to deduct expenses, so you must calculate which option is more financially beneficial.

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Buy-to-let tax relief

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Landlords also receive a tax credit based on 20% of their buy-to-let mortgage interest payments.
 
For example, if you made £15,000 in a tax year of rental income and are in the 20% tax bracket, your rental income tax bill would be 20% of the £15,000 = £3,000.

If your mortgage interest payments were £10,000 in the tax year, you would work out the tax relief on this amount:
20% of £10,000 = £2,000
So, the amount owed to HMRC for rental income tax would be £3,000 - £2,000 = £1,000.

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How much tax will I pay on my rental income?

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The tax you pay on your property income will depend on the profit you have made, income received from other sources and any tax relief you are entitled to.
 
To calculate your profit:

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add together all your rental income.

add together all your allowable expenses.

deduct the expenses from the income.

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If you have multiple properties, all your rental income and expenses are lumped together, giving you an overall profit for the year.
 

To calculate your tax

Your rental income is added to your other income from your job or pension, and you are taxed according to the normal income tax brackets.

 

Income Tax Band               Taxable Income 2023 – 2024           Income Tax Rate 2023 - 2024

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Personal Allowance                Up to £12,570                                       0%

Basic Rate                            £12,571 - £50,270                                20%

Higher Rate                          £50,270 - £125,140                              40%

Additional Rate                     £125,140 and above                              45%

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Deduct your buy-to-let tax relief.

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If you have a buy-to-let mortgage, you can claim tax relief for 20% of your mortgage interest payments.

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How tax is calculated on rental income: an example

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Here is an example of how your tax is calculated on your rental income:

Your annual rental income is £36,000, and your allowable expenses are £5,000, so you make £31,000 in profit from your buy-to-let property.

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You earn £50,000 in other income, giving you a total taxable income of £81,000.

You have a standard personal allowance of £12,570. You will pay no tax on this part of your income.

You'll pay 20% on the £37,699 between £12,571 and £50,270 (£7,540) and 40% on the remaining £30,730, which falls into the higher rate tax bracket (£12,292).

This gives you a total income tax bill of £19,832.

You have paid £20,000 in mortgage interest, so you are entitled to a tax credit of £4,000.

This leaves you with a tax bill of £15,832.

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What tax do I pay if I sell my rental property?

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As a buy-to-let landlord, you'll be liable for capital gains tax (CGT) when you come to sell if the rental property in question has increased in value during your period of ownership. Indeed, most properties rise in value – capital appreciation is one of the main reasons people invest in property.  
 
Property can be far more lucrative than other forms of investing, including stocks and shares. If you are in the basic tax band, you will pay 18% CGT on any profits from your sale. If you are in the higher tax band, you will pay 28%.

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Corporation tax vs. income and capital gains tax

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As a landlord, you can decide whether to set up your property business as a Limited company or own property in your name. Choosing the ownership structure will determine which type of tax you pay and how much you pay, so you should do the necessary calculations to determine which option is right for you.

If you set up as a limited company, you are required to pay corporation tax which is:

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Profits up to £50,000 - 19% tax on all profits.  

Profits between £50,000 to £250,000 – 25% (eligible for marginal relief)

Profits above £250,000 - 25% tax on all profits (not eligible for marginal relief)

Corporation tax rates are more favourable than high-earner personal income tax rates of 40% and 45%, so many property investors choose to set up limited companies for this reason.

Also, limited companies do not pay capital gains tax (CGT) when selling a property, while personal owners must pay CGT.

Other benefits of setting up as a limited company include avoiding paying tax on profits by retaining the money in the business and using it as a deposit on another property.

Yet another benefit for a landlord paying corporation tax rather than income tax is that they can treat mortgage interest payments as a cost. A self-employed landlord cannot deduct mortgage interest as an allowable expense. Instead, they receive a standard 20% landlord tax relief (regardless of their tax band). 

If you are unsure which property ownership option will be the most financially beneficial, please contact Taxitta Ltd and speak to an accountant for professional advice. 

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Non-resident landlord scheme

 

What does it mean to be a non-resident landlord?

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A non-resident landlord is someone who owns rental property in UK but resides somewhere outside the UK.

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According to the government of UK non-resident landlord may be:

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• A Company

• An Individual

• A Partnership

• A Trustee

 

What is the non-resident landlord scheme?

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The NRLS or non-resident landlord scheme is a tax scheme devised by the government of UK for non-resident landlords.
Tax is applied to the rental income whether you live in the UK or overseas. In cases where the landlord is not residing in the UK, HMRC collects tax on the rental income through NRLS. This scheme puts a legal obligation on the tenants or the letting agents to subtract tax from the rental income before giving it to the non-resident landlord. The tax deducted in this case is usually the basic rate tax.

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Would I be treated as a non-resident landlord if I am not in the UK for more than 6 months?

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Yes. Though it is not written in the law under the NRLS, HMRC regards any landlord who has not been living in the UK for six months or more to be a non-resident landlord.

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Who is required to use this scheme?

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In cases where the landlord of a rental property is living outside the UK then the tax will be deducted from the rental income by:

The tenant who pays a rent exceeding £100 per week or

The letting agent.

Who is considered a letting agent?

A letting agent is one who helps the landlord in running their rental business in UK. Letting agents are the ones who receive the rent or manage where the rent needs to go.

According to the government of UK a letting agent can be:

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• A solicitor

• An estate agent

• An accountant

• A friend of the landlord

 

Would I be considered a letting agent if I give legal advice to a non-resident landlord?

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No, you are not a letting agent if you only give legal advice or legal services to a non-resident landlord.

What do I need to do as a tenant?

If you are a tenant and your landlord lives abroad then you need to do the following:

Register with HMRC for the non-resident landlord scheme.

Deduct the tax.

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To register with HMRC for the NRLS, you will be required to provide:

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• Your name.

• Your address.

• Your landlord’s address.

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What do I need to do as a letting agent?

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As a letting agent, you are required to do the following.

• Register with the HMRC for the non-resident landlord scheme.

• Complete an annual report.

 

In order to register for the scheme as a letting agent, you will have to fill a NRL4i form. You can do this either online or through the postal service.

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How do I calculate the tax that I need to pay as a tenant?

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Here is how you can calculate the amount you need to pay as tax.

Add 3 months’ total rent for the quarter. This includes any amount you paid on behalf of the landlord and any uncleared cheques.

Subtract the deductible expenses in the 3 months.

After subtracting the deductibles, multiply the net amount you have by the basic rate income tax of 20%.

The amount you get after this last step is the amount of tax you need to pay.

What to do if there is more than one landlord?

In cases where there is more than one landlord who owns the rental property equally then you need to apply the £100 threshold to each landlord separately.

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What happens if there is more than one tenant?

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In such cases, the £100 rule will be applied to each tenant separately. If each tenant pays 75 pounds per week as rent, then it makes it less than 100 pounds and so neither of the tenants are required to use the NRLS.

When do I need to submit the payments?

You are required to send the payments within 30 days at the end of every tax quarter meaning:

30th June

30th September,

31st December

31st March.

 

When should I send the reports?

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You need to use the form Non-resident landlord: annual information return (NRLY) for sending the reports and you must send the reports by 5th July to both the HMRC and the landlord. You also need to give the certificate NRL6 each year to your landlord by the 5th of July.

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What is the non-resident landlord’s responsibility under the NRLS?

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Since tax is deducted by your tenant or letting agent the NRLS scheme does not require you to do anything. But still, you do need to submit a self-assessment returns form because you get income from UK property. You can deduct the tax paid under the NRLS from your self-assessment tax returns.

If you do not have time or find it hard to prepare and file your self-assessment, do not worry contact Taxitta Ltd accountants with confidence who will take care of your compliance worries.

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Is it possible for a non-resident landlord to get tax exemption?

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Yes. Non-resident landlords can apply to the HMRC to get tax exemption.

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On what conditions does HMRC approve no tax deductions for non-resident landlords?

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If non-resident landlords fulfil the following conditions, HMRC may grant exemption from deduction of tax under the NRLS.

Record of tax compliance: The non-resident landlord must have a clean tax record. That means that you have a history of filling accurate and timely tax returns.

No Tax obligations: You will need to prove that you do not have any tax obligations in the UK.

Application submission: You need to submit an application to HMRC to get their approval for no tax deductions on your rental income.

Not liable to UK tax for the relevant tax year: You must prove that you are not liable to pay tax in the UK for the year in which you are submitting the application.

If the above-mentioned conditions are met, the HMRC will give you the approval to receive rental income with no tax deducted.

Depending on the legal status of the landlord’s business, the application should be made on one of the following forms.

NRL1i – if the applicant is an individual.

NRL2i – if the applicant is a company.

NRL3i – if the applicant is a trustee (including a corporate trustee)

If a UK resident decides to leave UK and live abroad, the application should be made no more than 3 months before leaving.

Please do not forget to provide your UK tax reference number and their National Insurance number to HMRC.

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Am I entitled to personal allowance as a non-resident?

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As a non-resident you may be entitled to the personal allowance if you meet the following conditions:

You have a British passport.

You have EEA citizenship.

There is a double taxation agreement between UK and country of your residence.

You can claim a personal allowance of £12,570 at the end of each tax year by sending form R43 to HMRC.

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Can I get tax exemption if I have sovereign immunity?

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Yes, you can. Having sovereign immunity makes you exempt from paying UK tax and so as a non-resident landlord you should apply to HMRC for no tax deductions on your rental income.

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Do I need to apply for tax exemption if I have sovereign immunity?

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There is no need for you to fill an application form if you have a sovereign immunity. You just need to write a letter to the HMRC. It would be best if you could attach a copy of the letter confirming your sovereign status.

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How can an accountant help me use the NRLS?

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Professional help will make using the NRLS easier. Your accountant will help you in:

Filling your tax returns.

Submitting your tax return forms in time.

Understanding and navigating the double taxation treaty.

Making use of allowable expenses if applicable.

Registering to the non-resident landlord scheme.

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Conclusion

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The non-resident landlord scheme NRLS is developed by the HMRC to facilitate tax collection from the rental income of non-resident landlords. It is of extreme importance to follow all the rules and regulations set by the HMRC for the NRLS. It is crucial to correctly calculate the tax that needs to be deducted whether you are a tenant or a letting agent. It is highly recommended to hire a professional to give you expert advice. Your accountant can guide you through the ins and outs of this scheme.
 

Rent a Room scheme

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The Rent a Room scheme is a scheme that allows you to earn up to £7,500 a year tax-free from renting out a part of your own home, if you also live there.

If what you earn from renting out the room is less than £7,500, you don’t even need to declare it to HMRC. It’s tax-free.

If you make more, you still must file a Self-Assessment tax return, but you can claim £7,500 as a flat tax-free allowance.