You Are Not Taxed On What You Bank
Most guides to landlord tax start with the rates. That is the wrong place to start, because the rate is rarely the problem. The problem is the number the rate is applied to.
Since April 2020, a residential landlord's taxable property profit has been calculated before deducting mortgage interest. You get relief for that interest separately, as a credit worth 20 percent, and only after the tax has been worked out. The practical effect is that a geared landlord declares a profit that is larger, sometimes much larger, than the money that actually reached their account. Every threshold in the tax system then measures you against that inflated figure.
From 6 April 2027 it gets more expensive again. Property income will have its own set of rates: 22 percent, 42 percent and 47 percent, each two points above the equivalent rate on earnings.
This guide covers how the calculation works in practice, what you can and cannot deduct, the allowances worth claiming, the Making Tax Digital timetable, and where the real money is lost. Worked examples throughout, with our own view at the end.
What Counts As Rental Income
Rental income is the rent plus anything else the tenant pays you in connection with the let. That includes payments for utilities, cleaning, gardening, furniture hire and any non-refundable deposits you keep. A deposit you hold and expect to return is not income. A deposit you retain to cover damage is.
You have a separate property business for UK property and for overseas property. Within the UK business, all your properties pool together, so a loss on one offsets a profit on another in the same year. That pooling is useful and is the reason a second property is often easier to manage for tax than the first.
Short-term holiday lets no longer sit outside this. The furnished holiday lettings regime was abolished on 6 April 2025, so Airbnb and similar income is now taxed under the same rules as a twelve month assured shorthold tenancy. The old advantages, full interest deduction, capital allowances on furniture and Business Asset Disposal Relief on sale, have gone.
The Rates: Now and From April 2027
For 2026/27, rental profit is added on top of your other income and taxed at the normal rates.
| Band | Taxable income | Rate 2026/27 | Property rate from 6 April 2027 |
|---|---|---|---|
| Personal allowance | Up to £12,570 | 0% | 0% |
| Basic rate | £12,571 to £50,270 | 20% | 22% |
| Higher rate | £50,271 to £125,140 | 40% | 42% |
| Additional rate | Over £125,140 | 45% | 47% |
Two things are worth pulling out of that table.
First, those thresholds are frozen until April 2031. The Autumn Budget 2025 extended the freeze by another three years. Rents rise, thresholds do not, and a growing share of ordinary landlords will drift into the higher rate without ever buying another property.
Second, the April 2027 change creates a genuinely separate schedule of rates for property income, sitting alongside separate rates for savings and dividends. Relief for finance costs moves up with it, to 22 percent. The government's stated reasoning is that property, savings and dividend income does not bear National Insurance, so a two point premium narrows the gap with earned income. That is a fair argument as far as it goes, though it is worth noting the gap being closed is 8 percent for an employee and 6 percent for the self-employed on the main band. Two points closes roughly a quarter of it.
Scotland sets its own income tax rates and bands on property income, so Scottish landlords should read the table above as applying to the rest of the UK.
Section 24: The Restriction That Does The Damage
This is the mechanic that catches people, so it is worth going slowly.
You work out your property profit without deducting any residential mortgage interest or other finance costs. Arrangement fees, broker fees and interest on a loan taken out to buy or improve the property all fall into this category. You then pay tax on that profit at your marginal rate. Only then do you subtract a basic rate tax reduction.
That reduction is 20 percent (22 percent from April 2027) of the lowest of three amounts:
- your relievable finance costs for the year, plus any unrelieved amount carried forward from earlier years
- your property business profits after deducting brought forward losses
- your adjusted total income, broadly your income above the personal allowance, ignoring savings and dividend income
Anything you cannot use is carried forward indefinitely and goes into the first of those three amounts next year. Nothing is permanently lost, but relief can be deferred for a long time if your profits are thin.
Commercial property is outside this restriction entirely. If you let offices, shops, warehouses or land, interest is still a straight deduction against profit. The restriction applies to residential lettings held personally, and to partnerships and trusts holding residential property.
What it looks like on real numbers
Take a landlord with one property. Rent of £24,000 a year, £3,000 of allowable running costs, and £9,000 of mortgage interest. The money that actually reaches the bank is £12,000.
If they are a basic rate taxpayer:
Taxable property profit is £24,000 minus £3,000, so £21,000. Tax at 20 percent is £4,200. The finance cost credit is 20 percent of £9,000, so £1,800. Net tax is £2,400, which is exactly 20 percent of the £12,000 they actually made. The system works as advertised.
If they are a higher rate taxpayer:
Same £21,000 profit, but taxed at 40 percent, so £8,400. The credit is still only £1,800, because it is fixed at the basic rate. Net tax is £6,600 on a real profit of £12,000. That is an effective rate of 55 percent.
From April 2027 the same landlord pays 42 percent on £21,000, which is £8,820, less a 22 percent credit of £1,980, so £6,840. The effective rate on real profit goes to 57 percent.
Notice what the two point rise actually does. Because the rate and the credit both move by two points, the gap between them stays at 20 points. The extra cost lands on the part of the profit that is not covered by the credit, which is the part funded by the lender. Landlords with no mortgage pay two points more on real profit. Landlords with a mortgage pay two points more on a figure inflated by their interest bill.
The Threshold Problem Nobody Warns You About
The finance cost credit reduces your tax bill. It does not reduce your income for any other purpose. That distinction is where a lot of money quietly disappears.
Your adjusted net income, the figure used for the personal allowance taper and the High Income Child Benefit Charge, includes your property profit before mortgage interest. So does the figure used to decide whether you have crossed into the higher rate band, and the figure that drives your payments on account.
Here is how badly that can go. A landlord earns £88,000 from employment. Their property makes £14,000 of profit before interest, and the mortgage costs £12,000. Real profit from the property is £2,000.
Their adjusted net income is £88,000 plus £14,000, which is £102,000. Crossing £100,000 costs them £1 of personal allowance for every £2 above it, so they lose £1,000 of allowance and pay 40 percent on it, an extra £400. On top of that, the property profit itself attracts 40 percent of £14,000, which is £5,600, less a credit of £2,400, so £3,200.
Total tax caused by the property: £3,600. Real profit from the property: £2,000.
That is not a rounding error or an edge case. It is the ordinary arithmetic of a mortgaged property owned by someone whose salary is near £100,000. The same trap sits at £60,000 for anyone claiming child benefit, where the charge begins and runs to full withdrawal at £80,000. The interest you pay your lender is invisible to all of it.
If you are anywhere near £60,000 or £100,000 of total income and you own a mortgaged rental, this is the single calculation worth running before the end of the tax year, because pension contributions are one of the few things that reduce adjusted net income and they have to be made in time.
What You Can Deduct
The test is the same one that applies to any business. The cost has to be wholly and exclusively for the purposes of the letting, and it has to be revenue rather than capital.
Generally allowable:
- General maintenance and repairs, including redecoration between tenancies
- Water rates, council tax, gas and electricity where you pay them
- Landlord insurance, buildings and contents
- Letting agent fees, management fees and tenant finding fees
- Accountancy fees for preparing the property pages of your return
- Legal fees on a lease of a year or less, and on renewals of a lease under 50 years
- Ground rent and service charges
- Direct costs such as advertising, phone calls, stationery
- Vehicle running costs for the business proportion of journeys, or HMRC mileage rates if you use the simplified method
Not allowable:
- The capital repayment element of a mortgage
- Improvements and enhancements, which are capital
- The cost of buying the property, including survey and legal fees on purchase
- Your own time
- Anything with a private element that cannot be separated out
Repairs against improvements
This is the most frequently argued line in property tax, and the working rule is simpler than it sounds. If you restore the property to its previous condition, that is a repair. If you make it better than it was, that is an improvement.
The nuance that helps landlords is the modern equivalent principle. Replacing rotten single glazed windows with standard double glazing is a repair, because double glazing is what anyone would fit today and the improvement is incidental to the materials available. Replacing a worn kitchen with an equivalent standard kitchen is a repair. Knocking through to extend the kitchen is not. Adding a conservatory is not.
Capital spending is not wasted. It goes into the base cost of the property and reduces the gain when you sell, so it turns up again in your capital gains tax calculation. Keep the invoices, because a refurbishment done in 2026 may not matter until a sale in 2041.
Replacement of domestic items relief
You cannot claim for furnishing a property for the first time. You can claim when you replace a domestic item that is provided for the tenant's use: beds, sofas, carpets, curtains, fridges, washing machines, crockery.
The deduction is the cost of a like for like replacement, plus disposal costs of the old item, less anything you get for it. If you upgrade, you claim only what the equivalent item would have cost. The relief is not available if you claimed the property allowance, or if Rent a Room relief was claimed on that property.
Allowances Worth Knowing
The property allowance
The first £1,000 of property income is tax free. If your gross rents are under £1,000 you have nothing to declare at all. Above that, you can choose to deduct the £1,000 instead of your actual expenses.
It is strictly all or nothing. Claim the allowance and you claim no expenses, no finance cost credit and no replacement of domestic items relief. It only makes sense where your real costs are genuinely tiny, which usually means a small amount of land, a parking space, or a room let that falls outside Rent a Room.
Worth noting that £1,000 has not moved since the allowance was introduced in 2017. Against general inflation since then it would be worth comfortably more than £1,300 today. It is one more frozen figure quietly shrinking in real terms, and unlike the frozen income tax thresholds, nobody talks about this one.
Rent a Room
If you let furnished accommodation in your own home, the first £7,500 a year is tax free. If someone else also receives income from the same property, a spouse or joint owner, the threshold halves to £3,750 each.
Below the threshold the exemption is automatic and there is nothing to file. Above it, you choose each year: claim the £7,500 and pay tax on the excess with no expense deduction, or ignore the scheme and report income and expenses normally. For a lodger in a property you already occupy, the scheme is almost always better. Run both numbers if your gross receipts are over about £10,000.
Losses
Property losses carry forward against future profits of the same property business. You cannot set them against your salary or your trading income, and you cannot carry them back. A loss on your UK property business cannot be used against your overseas property business, or the reverse.
Reporting: When You Have To File
| Situation | What you do |
|---|---|
| Property income £1,000 or less | Nothing. Covered by the property allowance |
| Between £1,000 and £2,500 | Contact HMRC. It may be collected through your tax code |
| Over £2,500 after expenses, or over £10,000 before expenses | Register for Self Assessment and file a return |
The deadlines are the usual ones. Register by 5 October after the end of the tax year in which you first had the income, file online by 31 January, pay by 31 January. If your bill exceeds £1,000, payments on account start, and this is where landlords are most often ambushed. The first year you owe £4,000 you actually pay £6,000 in January, because half of next year's estimate is due at the same time.
National Insurance
Rental income is not usually earnings, so there is no National Insurance on it. The exception is if HMRC treats you as running a business rather than holding an investment, which means being gainfully employed as a landlord: several properties, being your main occupation, actively buying more. In that case Class 2 National Insurance can apply. It is rarer than landlords fear, and more common than portfolio landlords assume.
Making Tax Digital Is The Next Big Change
Quarterly reporting starts in April 2026 for landlords, and the phasing is by income.
| From | Qualifying income over | Measured in tax year |
|---|---|---|
| April 2026 | £50,000 | 2024/25 |
| April 2027 | £30,000 | 2025/26 |
| April 2028 | £20,000 | 2026/27 |
There is a detail here that has been badly under-reported, and it matters more than the dates.
Qualifying income is gross, not profit. It is your rents plus any self employed turnover, before a single expense is deducted. A landlord with £52,000 of rents, a £9,000 mortgage and £6,000 of costs makes a real profit of around £37,000 but is inside Making Tax Digital from April 2026. A landlord with £45,000 of rents and no mortgage makes more money and is not.
So the compliance burden is handed out according to turnover, while the tax is charged on profit, and the landlords hit first are disproportionately the geared ones with the thinnest margins. If you own two average properties in North London, you are almost certainly over £50,000 of gross rent already.
The practical answer is to stop keeping property records in a spreadsheet. Quarterly updates mean the books have to be current within a month of each quarter ending, which is a different discipline from a shoebox in January. Our guide to Making Tax Digital covers the mechanics, and a proper bookkeeping system with a bank feed per property makes this close to painless.
Joint Ownership and Spouses
For married couples and civil partners who own property jointly, income is split 50/50 by default, regardless of who actually owns what share. If the real beneficial ownership is different, say 90/10, you can be taxed on the actual split, but only by filing a Form 17 declaration backed by a declaration of trust, and only from the date HMRC receives it. It cannot be backdated.
With bands frozen to 2031 and property rates rising in 2027, this is worth more than it used to be. Moving £10,000 of profit from a higher rate spouse to a basic rate spouse saves £2,000 now and £2,000 after 2027, every year, for the cost of some paperwork done once.
Unmarried joint owners are taxed on their actual beneficial shares, so the 50/50 default does not apply and Form 17 is not needed.
Should You Hold Property In A Company?
This is the question every landlord asks after reading about Section 24, and the honest answer is that it depends on facts that have nothing to do with the tax rate.
The case for a company is real. A company deducts mortgage interest in full, with no restriction. It pays corporation tax at 19 or 25 percent on profit after interest, not 42 percent on profit before it. From April 2027 that gap widens further, because company rates are not moving.
The case against is also real, and it is mostly about the cost of getting there and the cost of getting money out.
- Moving a property you already own into a company is a sale at market value. It triggers capital gains tax on the way out and stamp duty on the way in, including the surcharge on additional dwellings.
- You will need to redeem your personal mortgage and take a company one, usually at a higher rate and with an arrangement fee.
- Profit inside the company is not your money. Taking it out as a dividend costs a second layer of tax, and dividend rates went up in April 2026.
- Annual costs go up: statutory accounts, a corporation tax return, a confirmation statement.
Our rule of thumb after doing this modelling many times: if you own one or two mortgaged properties and you draw the income to live on, a company almost never pays. If you are a higher rate taxpayer with four or more properties, you are reinvesting rather than drawing, and you are still buying, the arithmetic starts to work, and it works best for properties you have not bought yet. The expensive mistake is incorporating an existing portfolio because of an article about Section 24 without anyone running the transfer costs first.
Our guide to sole trader versus limited company covers the general trade offs, though property has its own overlay because of the transfer costs.
Non-Resident Landlords
If you live abroad for six months or more and let UK property, your letting agent, or your tenant if the rent is over £100 a week and there is no agent, must deduct basic rate tax from the rent before paying it to you. That deduction rate follows the property basic rate, so it moves to 22 percent in April 2027.
You can apply to receive rent gross using form NRL1 if your tax affairs are up to date. You still file a UK return and you still pay UK tax on UK property, whatever your residence status. The personal allowance is often still available depending on nationality and treaty position, which surprises people.
Our Honest Take
The design is coherent for basic rate landlords and broken for everyone else. As the worked examples show, a basic rate landlord pays exactly the headline rate on their real profit. A higher rate landlord with moderate gearing pays 55 percent, and one caught by the personal allowance taper can pay more tax than they made. Section 24 was sold as removing a subsidy for higher rate landlords. What it actually does is tax borrowed money, and the effect grows as leverage grows, which means it bites hardest on the newest and smallest portfolios rather than the largest and most established.
Do the threshold calculation before you do the expense calculation. Landlords spend hours hunting for another £200 of deductible costs and then miss a £1,000 outcome sitting at the £60,000 or £100,000 line. The deductions matter, but they are the small money. The thresholds are the big money, and they are the ones you can only act on before 5 April.
Treat April 2027 as a planning deadline, not a news item. A separate schedule of property rates is a structural change, not a one off increase. Once property income sits in its own box with its own rates, that box can be adjusted again without touching the headline rate of income tax, which is politically much easier. We would plan on the assumption that the gap between property rates and earnings rates widens rather than closes.
Be sceptical of anything marketed as a way to avoid tax on rental income. The legitimate levers are short and dull: claim every real expense, use the replacement of domestic items relief, split ownership sensibly with a spouse and file the Form 17, make pension contributions if you are near a threshold, choose between Rent a Room and normal reporting on the arithmetic, and think carefully before incorporating. Everything else being sold tends to involve either a structure HMRC has already litigated or a fee that exceeds the saving.
Get the record keeping right now rather than in 2028. Making Tax Digital will reach almost every landlord, and the transition is far easier from a clean set of digital records than from a drawer of receipts. Landlords who move to proper software a year early tend to find the first quarterly update uneventful. Landlords who leave it to the deadline tend not to.
How IAK Can Help
We act for landlords and property developers across North London and Hertfordshire, from a single flat let out after moving in with a partner to portfolios held through several companies.
For landlords that means preparing the property pages of your return with every deduction claimed and the finance cost credit applied correctly, modelling your adjusted net income before the year ends so the personal allowance taper and child benefit charge do not arrive as a surprise, setting up Xero with a bank feed per property ready for Making Tax Digital, handling Form 17 declarations where a spouse split makes sense, and running proper incorporation modelling on your own figures before you commit to anything.
If you have bought your first rental and want to know what you are in for, or you have owned several for years and have never had the Section 24 position explained properly, get in touch. Our tax planning work with landlords usually pays for itself in the first year, and if it does not, we will tell you that instead of selling you something.
Sources
- Renting out your property: paying tax and National Insurance, GOV.UK, for the £1,000 property allowance, the £2,500 and £10,000 reporting thresholds and the circumstances in which Class 2 National Insurance applies to a landlord.
- Work out your rental income when you let property, GOV.UK, for allowable and disallowable expenses, the all or nothing nature of the property allowance, carry forward of property losses and replacement of domestic items relief.
- Changes to tax rates for property, savings and dividend income, GOV.UK, published 26 November 2025, for the property basic, higher and additional rates of 22, 42 and 47 percent from April 2027 and for finance cost relief moving to 22 percent.
- PIM2058: restriction on relief for finance costs, HMRC Property Income Manual, for the three amounts the basic rate tax reduction is the lowest of, and for the carry forward of unrelieved finance costs.
- PIM2054: restriction on income tax relief for residential property finance costs, HMRC Property Income Manual, for the phasing of the restriction from 2017/18 to full effect in 2020/21.
- PIM3210: replacement of domestic items relief, HMRC Property Income Manual, for the four conditions for the relief and the exclusion where Rent a Room relief has been claimed.
- Rent a Room scheme, GOV.UK, for the £7,500 threshold, the £3,750 shared threshold and the automatic nature of the exemption below it.
- Abolition of the furnished holiday lettings tax regime, Deloitte Taxscape, for the end of the FHL rules on 6 April 2025 and the loss of full finance cost deduction, capital allowances and Business Asset Disposal Relief.
- Autumn Budget 2025: a summary, House of Commons Library, for the extension of the income tax threshold freeze to April 2031.