How Much Tax Does A Landlord Need To Pay?
Want to find out how much tax landlords have to pay? Well, by the end of this blog, you’ll understand everything about landlord tax in the UK.
In this article, we will talk about landlords' tax obligations, including earnings, expenses, and tax reporting requirements. Finally, we'll stress how important it is to tell the tax people exactly how much money you make from renting.
The Basics of Landlord Taxation
Before we look at the complexities of landlord taxation, let's explore some fundamentals. As a landlord, when you earn money from renting a property, you are liable to pay tax on this income.
In short, just like most income earned in the UK, the government takes a percentage of the money that you make from renting out your property. Let's break down how much tax you will need to pay as a landlord in the UK.
Taxable Income for Landlords
As we've just mentioned, 'taxable income' for landlords it the money that you are liable to pay tax on. As a landlord, your taxable income is the money you earn from renting out your property. This tax rate can reach up to 45%, depending on your income.
If your rental income is less than the £12,570 basic rate threshold, you won't be taxed on it.
20% of your rental income, over £12,570 but under the higher rate threshold of £50,270, is subject to tax.
Rent income over £50,270 and under the £150,000 extra rate threshold is subject to 40% tax.
If your rental income exceeds the £150,000 extra rate threshold, you will be required to pay 45% in tax.
Picture it as breaking down your earnings into categories. Whilst rent is classified as taxable income, any expenses such as necessary repairs and home improvements may be tax deductible. Understanding these details can help you save money in your final tax return.
Deductible Expenses
Now, let's talk about deductible expenses. Deductible expenses are an intelligent way for landlords to manage their money and pay less taxes. These are the things related to your rental property that you can use to lower your taxable income.
Imagine you spend money on fixing things or keeping your property in good shape—those expenses can often be deducted.
And here's a tip: If you're a non-resident landlord, understanding deductible expenses is even more crucial.
Capital Gains Tax on Property Sales
Whether you're doing your tax returns online, using UK tax return services, or dealing with non-resident landlord tax returns, understanding capital gains tax is critical. When landlords sell a property, if your property's value increased from when you bought it to when you sold it, that gain will be taxed. It's like sharing a bit of the profit you made.
But here's the silver lining: There are certain situations, like selling your main home, where you might not need to pay this tax.
Reporting Rental Income
When you're a landlord, you must let HMRC know exactly how much money you're making from renting out your property.
Imagine it as a simple task: you report your rental income, and the HMRC use this information to ensure everything adds up. Accuracy is critical here. If you fail to do so, you may get caught up with some issues with HMRC.
Types of Property Ownership
In the United Kingdom, property ownership is divided into two categories: freehold and leasehold for non resident landlord tax return.
Freehold means you own both the structure and the land. This sort of ownership allows you total control over the property.
Leasehold means you own the property but not the land. Instead, you lease the land for a certain period (typically decades or centuries).
This kind of ownership has no direct impact on your tax rate, but recognising the difference is useful when managing obligations and costs for your rental property.
How is the Tax on my Rental Income Calculated?
The tax on rental income is determined using your total taxable income. This covers both your rental income and any other sources of income, such as salary, pensions, or dividends. The tax is then calculated based on your income tax bracket.
Calculate your rental income tax:
- Add up all the rental revenue.
- Subtract permitted expenditures (e.g., mortgage interest, repairs, insurance).
- You will be taxed on the leftover amount (your net profit).
For example, if your rental revenue is £20,000 and your permitted costs are £5,000, your taxable income from the property is £15,000.
What Tax Expenses May I Claim?
As a landlord, you may claim a variety of costs to lower your taxable income. These deductions are critical for decreasing the tax burden on your rental revenue. Some frequent permissible costs are:
Mortgage interest: Basic-rate taxpayers may deduct a part of their mortgage interest payments.
Repairs and maintenance: You may claim expenses for property upkeep, which includes replacing damaged appliances, repainting, and other repairs.
Insurance: Landlord, building, and contents insurance are all deductible.
Letting agency costs: The management fees are tax deductible if you use a letting agent.
Utilities and council tax: If you pay these expenses as a landlord, they may be deducted.
Travel expenditures: Travel expenses incurred in managing or maintaining the property might be reimbursed.
Is My Mortgage Interest Tax Deductible?
Mortgage interest relief permits basic-rate taxpayers to deduct 20% of the interest they pay on their mortgage from their rental income. Higher-rate taxpayers might seek tax relief rather than a deduction. Although the restrictions for mortgage interest deductions have tightened in recent years, this relief may still help you pay less tax.
Property Allowance Versus Claiming Expenses
Landlords might choose to claim real expenditures or a property allowance. The property allowance is a set sum of £1,000 that may be claimed as tax-free income each year. This option is beneficial for people with little costs since it saves time and effort when calculating and reporting individual expenses. However, if your expenditures surpass £1,000, it is often preferable to claim them directly.
Ways to Lower Capital Gains Tax
If you decide to sell your rental property, you may have to pay Capital Gains Tax (CGT) on the proceeds. However, there are various strategies to lower the CGT liability:
Entrepreneurs' Relief: If you qualify, this relief decreases the amount of CGT due when you sell your property, subject to certain restrictions.
Principal Private Residence Relief (PPRR): If you've lived in the property as your primary residence for some time, PPRR may lower your CGT.
Annual Exemption Amount: Individuals may take advantage of the yearly tax-free CGT limit of £6,000 (from 2023-24).
Will I Need to Register for Self-Assessment?
If your annual rental income reaches £10,000 or your total taxable income from other sources exceeds the basic tax-free level, you must register for self assessment with HMRC. During this procedure, you will file a tax return that includes your rental revenue, additional income, and authorised costs.
If your income is less than £10,000 but more than the personal allowance, you may still be required to register if you have other sources of taxable income.
How Should I Report My Rental Income?
Your rental income will be reported on your Self Assessment tax return (form SA100). HMRC asks you to complete a supplemental form for property income (SA105). To ensure that your tax is computed accurately, you must submit facts about your rental income and the costs you are claiming.
Deadlines for filing:
- Online tax returns are due on January 31 (after the end of the tax year).
- The deadline for filing paper tax returns is October 31.
How Much Tax Will I Pay on Rental Income?
Your income tax band determines how much tax you pay. The tax rates for the 2023-24 fiscal year are as follows:
- Basic rate (20%): £12,571-£50,270
- Higher rate (40%): £50,271 to £125,140
- Additional rate (45%): More than £125,140
If your entire income (rental income + pay) falls within these brackets, you will be taxed proportionately. The rental income is combined with your other sources of income, and tax is computed on the overall amount.
Example of Tax Calculation
Assume your entire rental income is £20,000 and your permitted costs are £5,000. Your taxable income would be £15000. Assuming your whole income (including additional income) falls under the basic tax bracket, you would pay 20% tax, resulting in a £3,000 tax payment.
What If I Make a Loss?
If your costs surpass your rental revenue, you will experience a rental loss. You may carry over this loss to offset future gains, lowering your tax bill in coming years.
How to Determine Your Income Tax Band
Your income tax bracket is determined by your total taxable income, which includes rental income as well as any other sources of income (such as wages or pensions). HMRC has tools to assist you in computing this. However, the easiest method is to:
- Add together your total revenue (rental and non-rental).
- Subtract any allowed expenditures.
- Determine the appropriate tax band based on the remaining taxable income.
For example, if your total taxable income (after deductions) is £15,000, you are in the basic rate tax bracket.
Conclusion
So, there you have it—our guide to landlord taxes made as simple as possible. We explored the basics, talked about deductible expenses, checked out capital gains tax, and emphasised the importance of reporting rental income accurately. Whether you're navigating tax returns online, using UK tax return services, or handling a non-resident landlord tax return, remember to keep it clear, share the correct info, and you'll ace the landlord tax game.
If you're looking for ways to save up some money on taxes as a non resident landlord tax return, consider using Taxd, an online tax software.
Frequently Asked Questions
1: How much tax do I pay as a landlord on the money I earn from renting out my place?
You'll have to pay up to 45% tax on the money you make from renting.
2: What are deductible expenses, and how do they help me as a landlord?
Deductible expenses are like special coupons. They help you lower the money HMRC want from your rental income.
3: Do I have to pay extra tax when I sell a property I own?
Yes, when you sell, you will have to pay capital gains tax on the profit you made.
4: Why is it important to report my rental income accurately?
Reporting accurately helps HMRC make sure everything adds up.
5: Can I do my landlord tax returns online, and how do I use UK tax return services?
Absolutely! You can manage your taxes online. UK tax return services like Taxd can guide you through the process quickly.