Tax on rental income: the basic rules for individual landlords

If you let out a property, the starting point is simple. You pay Income Tax on the profit, not on the rent itself.

Profit means the rental income you receive, less the expenses or allowances that the tax rules allow. The final tax rate depends on your total income for the tax year, not just the rent from the property.

The Main Point

Rental profit is taxed as income. For 2026/27, taxpayers in England, Wales and Northern Ireland normally pay tax on rental profit at the same 20%, 40% or 45% income tax rates that apply to employment income and pension income. Scottish taxpayers have different income tax bands for this type of income.

From 6 April 2027, the government has announced separate property income tax rates for 2027/28. The rates are expected to be 22%, 42% and 47%, depending on the taxpayer’s income level. This is effectively an extra 2 percentage points on taxable rental profit compared with the current main income tax rates. This does not change how the rental profit is calculated; it changes the tax rate applied to that profit.

If you own more than one UK let property personally, they are usually treated as one UK property business. A loss on one UK property can therefore reduce the profit on another UK property in the same tax year. Overseas property is dealt with separately.

What counts as rental income

Rental income is not limited to the monthly rent. It can include payments for furniture, services, cleaning, heating, repairs, insurance recharges, parking, storage, or other amounts paid by the tenant for using the property.

If a tenant pays a deposit, the deposit is not normally taxable when received if it is held as security. If part of the deposit is kept later to cover unpaid rent or damage, that amount needs to be reviewed in the year it is kept.

Cash received or rent earned?

Most individual landlords use the cash basis if their property income is not more than £150,000 for the tax year. Under the cash basis, rental income is normally counted when it is received, and expenses are normally counted when they are paid.

If the annual property income is above £150,000, or if the landlord chooses not to use the cash basis, the standard accounting basis applies. Under that method, the rent and expenses are normally matched to the period they relate to, even if they are paid earlier or later.

The cash basis is simpler, but it is not always the best basis. For example, timing differences can matter where rent is paid in advance, expenses are paid late, or a property business is growing quickly.

Expenses landlords can usually claim

A cost is normally deductible if it is incurred for the rental business and is not a private cost or an improvement to the property. Typical deductible costs include:

If a cost is partly private and partly for the rental business, only the rental business part can be claimed. Records should show how the business part has been calculated.

Repairs are different from improvements

Repairs usually reduce taxable rental profit. Improvements usually do not.

A repair restores something that already exists. Replacing a broken boiler, repairing a roof, redecorating between tenants, or replacing a damaged window will often be repair work. Using a normal modern equivalent is not usually a problem. For example, replacing old single-glazed windows with ordinary double-glazed windows can still be a repair.

An improvement adds something new, upgrades the property, or makes it better than it was. Building an extension, adding a new bathroom where there was none before, or replacing a basic kitchen with a much higher specification kitchen is likely to be capital spending. It is not normally deducted from rental income, although it may be relevant if the property is sold later.

Work done soon after buying a property can be sensitive. If the property was bought in poor condition and the work was needed to make it fit to let, HMRC may treat the cost as capital rather than a repair.

Furniture and domestic items

The initial cost of furnishing a rental property is not normally deductible from rental income. There is, however, relief for replacing certain domestic items in a residential let.

This can cover items such as movable furniture, curtains, carpets, white goods, appliances and kitchenware. It applies to replacements, not the first purchase of the item. The old item must stop being available for the tenant to use.

If the replacement is an upgrade, relief is normally limited to the cost of a like-for-like replacement. A reasonable modern equivalent, such as a more energy-efficient fridge replacing an old fridge, should not normally be treated as an upgrade for this purpose.

Mortgage interest and other finance costs

For individual landlords with residential property, mortgage interest is not deducted in the same way as most other expenses. Instead, it usually gives a basic rate tax credit.

In practical terms, this means a higher rate or additional rate taxpayer does not get full tax relief at 40% or 45% for residential mortgage interest. For 2026/27, the relief is generally limited to the 20% basic rate. From 6 April 2027, it is expected to be given at the new property basic rate of 22%. The restriction can also increase the taxable income figure used for other purposes, because the rental profit is calculated before giving the tax credit.

The rules apply to finance costs such as mortgage interest, loan interest, overdraft interest and some fees connected with borrowing. The borrowing must still be for the rental business. If a loan is partly for private use, the finance cost must be split on a reasonable basis.

Property losses

If the allowable expenses are more than the rental income, there is a property loss. For UK property, the loss is normally carried forward and used against future profits of the same UK property business. It is not normally set against salary, pension income, dividends or other non-property income.

Loss relief is restricted where the let is not on commercial terms. This commonly matters where a property is let to a family member or friend at a reduced rent. In that case, expenses are usually limited to the rent received, so the arrangement cannot create a tax loss.

The property allowance

Individuals can receive up to £1,000 of property income tax-free under the property allowance. If the income is not more than £1,000, it is usually exempt and does not need to be reported.

If the income is above £1,000, you can either deduct the £1,000 allowance or deduct the actual allowable expenses. You cannot do both. For example, if your gross rental income is £1,500 and you claim the allowance, the taxable amount is £500. The gross income is still £1,500; the allowance is then deducted.

This allowance is useful for small amounts, such as occasional rental income from a garage, driveway, storage space or similar. It is usually less useful where there are significant expenses.

Renting out a room in your own home

The rent-a-room scheme is separate from the general property allowance. It can apply only where you let furnished accommodation in your only or main home. The usual example is where you live in the property and take in a lodger. It can also apply to a guest house or bed and breakfast where the accommodation is part of your only or main home.

The current limit is £7,500 per year. If the income is shared with someone else, the limit is £3,750 each. If your income is below the relevant limit, the exemption is normally automatic. If your income is above the limit, you can choose whether to use the scheme or calculate the profit in the normal way.

The scheme is not available for ordinary buy-to-let property, a second home, unfurnished accommodation, accommodation that is not part of your main home when it is let, or a home let while you live abroad. It is also not available where a home has been converted into separate flats. The scheme is simple, but it is not always best. If the actual costs are high, calculating the profit in the normal way may produce a lower tax bill or a loss.

Short-term holiday lets

The old furnished holiday letting tax regime was abolished from April 2025. From 2025/26 onwards, short-term holiday lets are generally taxed under the ordinary property income rules rather than a special furnished holiday letting regime.

This change can affect mortgage interest relief, capital allowances, pension contribution planning and capital gains tax planning. Owners of former holiday lets should not rely on old summaries of the furnished holiday letting rules without checking the current position.

When HMRC needs to be told

You may need to tell HMRC about taxable rental profit even if no tax return has been issued. The general deadline for telling HMRC is 5 October after the end of the tax year in which the taxable profit arose.

You will normally need a Self Assessment tax return if HMRC asks for one, or if your rental income is high enough. As a practical guide, HMRC currently says a tax return is required if property income is more than £10,000 before expenses, or more than £2,500 after allowable expenses.

Making Tax Digital for landlords

Making Tax Digital for Income Tax is being introduced for many landlords. It requires digital records and quarterly updates through compatible software. It does not, by itself, change when the tax is paid.

The first group starts from 6 April 2026. The test looks at qualifying income from property and self-employment, before deducting expenses.

Practical record keeping

Landlords should keep records that show the rent received, the date received, expenses paid, mortgage interest, property improvements, deposits retained, and how any private or mixed costs have been split.

It is usually sensible to keep separate bank records for the property, retain invoices and completion statements, and keep a schedule of improvement costs. Some costs that are not deductible from rent may still be useful when calculating capital gains tax on a later sale.

This article is provided for general information only. It does not constitute tax, legal or other professional advice, and should not be relied on as a substitute for specific advice based on your particular circumstances.