Landlord tax guide - how much is tax on rental income 2023?

Whether you are a landlord with one rental property or a wider property business, paying tax on rental income if you make a profit may will be inevitable, depending on the amount of rental income you receive and the profit you make.

As a landlord, you need to be aware of a number of taxes that may affect you including income tax, corporation tax, stamp duty land tax and capital gains tax. However, not all of these are tax on rental income or will be applicable.

Tax may be liable when you buy a property, when you rent out the property and when you sell or pass the property on. In this blog we will cover the main areas of tax on rental income and also give you some brief details to other types of tax to be aware of at other stages.

Tax to pay when letting a property

Letting a property is like any other business in that if you make a profit on your total rental income, you will pay tax on the profit you make and the total income you earn.

Do I have to pay tax on income from property?

It is likely that you will need to pay tax on any profit you make from renting out property. However, the tax you pay and how you pay it will differ depending on if you own the property personally or via a limited company.

What rental income is taxable?

For property you personally own, the first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’. After that, any rental profit between £2,500 to £9,999 after allowable expenses or £10,000 or more before allowable expenses, will need to be reported on a self-assessment tax return.

Bear in mind that any profit from property will need to be added to any other income or earnings you receive from elsewhere and will be taxed.

Income tax is payable by individuals earning above the income tax threshold (see below re: income tax rates and thresholds).

For property owned by a limited company, rental income is counted and treated in the same way as any other business income and will be taxed accordingly via corporation tax (see below re: corporation tax). A company must pay tax on the profit made from renting out property, after deductions for ‘allowable expenses’.

Allowable expenses are things you need to spend money on in the day-to-day running of the property.

Income tax rates and allowances 2023/24

For those owning and renting property personally, you need to be aware of income tax rates and allowances as your rental income will be taxed in this way.

Your personal allowance is the amount you can earn before you start paying income tax. Currently this is £12,570, and it’s been frozen until 2028.

In the 2023-24 tax year, landlords pay 20 per cent tax on the profit from your buy-to-let income between £12,571 and £50,270.

If you earn above £50,271 in rental income in a year, you will pay 40% income tax on your profits between £50,271 and £125,000.

For profits over £125,001 you will pay the additional rate of income tax of 45%.

Corporation tax on rental income

As a landlord, you can buy your properties as an individual and pay income tax, or you can buy them through a limited company and pay corporation tax.

Over the years, the government have eroded some of the benefits that landlords obtain including changes to mortgage interest tax relief rules. With private landlords not being able to deduct mortgage interest payments and other mortgage expenses from their rental income to reduce their tax bill. This has forced many smaller landlords out of the market and has led to many more changing their status from paying tax as an individual to paying it via a company structure.

For many landlords, it is beneficial to set up a limited company for property rental. Transferring property to a limited company can have benefits including tax savings as paying corporation tax can be lower than paying income tax.

The corporation tax rates increased in April 2023, introducing more than one standard rate. Currently, Corporation Tax is 19% for profits up to £50,000, but this rate increases to 25% for companies with profits above £250,000. Profits of between £50,001 and £250,000 will be taxed at a graduated rate through marginal relief applied to the 25% rate, while companies making up to £50,000 in profit will continue to be taxed at 19%.

Do I have to pay National Insurance payments if I run a property business?

If you rent property out via a limited company, you have to pay Class 2 National Insurance if your profits are more than £12,570 a year. In the eyes of HMRC, what you do counts as running a business, if all the following apply:

• being a landlord is your main job
• you rent out more than one property
• you’re buying new properties to rent out

If your profits are under £6,725, you can make voluntary Class 2 National Insurance payments. You may wish to do this to ensure you qualify for certain benefits such as the State Pension.

You do not pay National Insurance if you’re not running a business - even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

Allowable expenses for landlords

There are some expenses that you can claim against your rental income profit that will reduce the tax you need to pay. These are called allowable expenses and you can deduct these. Allowable expenses can be things like business rates, insurance, service charges, property repairs and renovations.

To find out more about What are the allowable costs against rental income? read our blog here.

About landlord tax returns

Whether you rent out personally or via a limited company, you will need to complete a landlord tax return by 31 October for paper tax returns and 31 January for online tax returns.

If you rent property out personally, you will report rental income on a self-assessment tax return if it’s:

• £2,500 to £9,999 after allowable expenses
• £10,000 or more before allowable expenses

The process for self-assessment tax returns is as follows:

• Register for self-assessment with HMRC.
• Stay on top of deadlines and payments.
• Keep adequate records.
• Keep records of allowable expenses.
• Complete and file a self-assessment tax return.
• Complete and file year end accounts and company tax return form if renting via a limited company.
• Pay your tax due on time to avoid penalties and interest charges.

If rent property via a limited company, you will be a company director and will still be required to submit a self-assessment tax return for yourself to declare your earnings. However, your rental income will be reported via your company accounts and not directly on your tax return.

When should I report rental property income?

If you rent out property personally, you will report rental income on your self-assessment tax return. See deadline for these above.

If you rent out via a limited company, you will report property rental income in your annual accounts. You must prepare a Company Tax Return (form CT600) and year end accounts for HMRC. These must be delivered no later than 12 months after the end of the accounting period, even if you make a loss or have no Corporation Tax to pay.

Your company’s accounting period will begin on the day that it becomes active for Corporation tax, which may or may not be the day that it is incorporated at Companies House. Each accounting period will run for a maximum period of 12 months, ending on the accounting reference date (ARD) of your annual accounts.

When do I pay tax on rental income?

If you rent the property personally, once you’ve filed your tax return, you then need to pay the tax you owe. The deadline is the same as the final date for online self-sssessment tax returns the year after. i.e., for you 22/23 tax year, you will need to pay tax by 31 January 2024.

For landlords running a property rental business via a limited company, you must pay your Corporation Tax 9 months and 1 day after the end of your accounting period. Your accounting period is usually your financial year, but you may have 2 accounting periods in the year you set up your company.

What taxes do I pay if I sell my property?

You may have to pay Capital Gains Tax (CGT) if you make a profit (gain) when you sell a property that isnt your home or main residence, this includes all your buy-to-let properties.

You must report and pay any Capital Gains Tax on most sales of UK property within 60 days. Failing to report the sale and pay your tax on time is likely to land you with a penalty fee and interest charges.

You have an annual CGT personal allowance. This CGT allowance is called the annual exempt amount and from April 2023, the capital gains tax (CGT) allowance has been reduced from £12,300 to £6,000. From April 2024, it will be reduced again from £6,000 to £3,000.

The rate at which you pay CGT following the sale of a buy-to-let property depends on your taxable income. If you’re a basic rate taxpayer with an income of £50,000 or less, the rate is 18%. Higher rate taxpayers with an income of £50,001 or more pay 28%.

Stamp duty land tax (SDLT)

If you purchase buy to let properties, you need to consider Stamp Duty Land Tax.

If you are resident in the UK for tax purposes, already own your own home, and purchase a buy to let property you are required to pay a 3% SDLT surcharge. No surcharge will be payable where the buy to let property is the only property you own. For 23/24 SDLT rates, read our blog.

Note that the rules differ where any of the following apply:

• the property is purchased by a company or other entity
• the property is non-residential or mixed use
• the purchaser is a first-time buyer

When purchasing more than one ‘dwelling’ as part of a single transaction, or multiple linked transactions, a relief called Multiple Dwellings Relief is sometimes available to reduce your SDLT bill.

Summary

As a landlord with investment property and whether you buy property personally or via a limited company rental business, you’re likely to pay tax at every stage of that investment - i.e., when you buy the property, when you let the property, and later when you sell or pass it on.

How much tax you pay will differ dependant on whether you let it yourself or via a limited company rental business. It is always best to seek professional tax advice from accountants such as dns accountants, to understand the tax reliefs you can benefit from, the tax payable and your tax liabilities on rental income.

If you have or are planning to have rental properties and need tax advice and help, contact our specialist landlord team on 03300 886 686, or e-mail us at enquiry@dnsaccountants.co.uk.

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