Navigating the world of property taxation can be a daunting task, especially for small landlords who may not have a vast portfolio. This blog aims to simplify how taxable rental income is calculated for small landlords in the UK, focusing on the 2023/2024 tax year. We’ll discuss allowable rental expenses that can be offset and those that cannot, and compare these to previous years.
What is Taxable Rental Income?
Taxable rental income is the profit you make from renting out your property, after deducting allowable expenses. It’s important to note that only ‘revenue’ expenses can be deducted – these are the day-to-day costs of running your property, like repairs and maintenance, letting agent fees, and insurance. ‘Capital’ expenses, such as property improvements or enhancements, cannot be deducted from your rental income.
Let’s illustrate this with an example. Suppose you have a rental income of £20,000 in the 2023/2024 tax year. You’ve spent £5,000 on allowable expenses such as maintenance, letting agent fees, and insurance. To calculate your taxable rental income, you would subtract your allowable expenses from your rental income:
£20,000 (rental income) – £5,000 (allowable expenses) = £15,000 (taxable rental income)
Allowable Rental Expenses
There are several expenses that you can offset against your rental income:
- Maintenance and Repairs: This includes costs for routine upkeep, fixing broken appliances, or repainting the property. However, improvements like extensions or refurbishments are considered capital expenses and are not deductible.
- Professional Fees: You can deduct fees paid to letting agents, accountants, and property management companies. Legal fees for arranging letting contracts are also deductible.
- Utilities and Council Tax: If you pay for utilities or council tax for your property, these costs can be deducted.
- Insurance: Costs for buildings, contents, and public liability insurance can be offset against your rental income.
- Replacement of Domestic Items: You can claim the cost of replacing domestic items like furniture, appliances, and kitchenware. However, the replacement must be a like-for-like replacement, not an upgrade.
Changes in Mortgage Interest Deduction
One significant change in recent years is how mortgage interest is treated. Before April 2020, landlords could deduct their mortgage interest from their rental income before calculating their tax. However, from the 2020/2021 tax year onwards, finance costs are no longer deducted from income. Instead, landlords receive a basic rate tax reduction of 20% on their finance costs.
For example, if you have the same rental income and allowable expenses as in the previous example, but you also have £3,000 in mortgage interest, your tax reduction would be:
£3,000 (mortgage interest) x 20% (basic rate tax) = £600 (tax reduction)
Calculation of Tax Liability
The tax you pay on your rental income depends on your income tax band. For the 2023/2024 tax year, the bands for England, Wales, and Northern Ireland are:
- Personal Allowance: Up to £12,570 – 0% tax
- Basic rate: £12,571 to £50,270 – 20% tax
- Higher rate: £50,271 to £125,139 – 40% tax
- Additional rate: Over £125,140 – 45% tax
If your taxable rental income is £15,000 and you have no other income, you would fall into the basic rate band. Your tax liability would be calculated as follows:
£15,000 (taxable rental income)- £12,570 (personal allowance) = £2,430 (taxable income)
£2,430 (taxable income) x 20% (basic rate tax) = £486 (tax liability) So, you would pay £486 in tax on your rental income.
Expenses That Cannot Be Offset
Certain expenses cannot be offset against your rental income. These include:
- Capital Expenditure: As mentioned earlier, costs for improving or enhancing your property are not deductible from your rental income. However, these costs can be set against the eventual sale of the property for Capital Gains Tax purposes.
- Private Use: If you use part of your rental property for personal use, you cannot claim expenses for that portion. For example, if you use one room of your rental property as a personal office, you cannot claim expenses for that room.
PaperRocket‘S Services for Landlords
At PaperRocket Accounting, we understand that not all landlords are property moguls. Many are individuals who have moved in with a partner and started renting out their previous home, or have inherited a property that they’re now letting out for additional income.
Our landlord accounting package is designed to help you navigate the complexities of property taxation and covers up to 5 rental properties.
Navigating the world of property taxation doesn’t have to be daunting. With the right information and support, you can manage your rental income effectively and make the most of your investment.
PaperRocket are a multi award winning accounting practice, and Accredited FreeAgent Practitioners.
We specialise in providing friendly, non-accounting jargon, services for contractors, freelancers, sole traders, and landlords across the UK.
Our fixed fee monthly accounting packages all include a FreeAgent subscription as standard and unlimited support from your allocated accountant.
To find out how we can help you please get in touch now.