How landlord tax works for individuals
- Rental income minus allowable expenses (excluding mortgage interest) = rental profit.
- Rental profit is added to your other income (employment, self-employment).
- You're taxed at your marginal rate on that combined total.
- You then get a 20% tax credit on mortgage interest costs.
Worked example
- Annual rent: £18,000
- Allowable expenses (insurance, agent, repairs): £3,000
- Mortgage interest: £6,000
- Rental profit (pre-Section 24): £18,000 − £3,000 = £15,000
- If higher-rate (40%): tax on £15,000 = £6,000
- Less 20% tax credit on £6,000 mortgage interest = £1,200
- Net tax: £4,800. Cash profit (rent minus actual costs): £9,000. Effective tax rate ~53%.
Why Ltd-co landlords escape this
For limited companies, mortgage interest is fully deductible against rental income. Profit is taxed at Corporation Tax (19% small-profits rate, 25% main rate). Director takes income via salary/dividends.
For new purchases by higher-rate taxpayers, this often beats personal ownership — but you need to factor in mortgage availability (Ltd-co BTL is a smaller market) and slightly higher rates.
Frequently asked questions
Do I pay tax on the rent or the profit?+
Profit. You can deduct allowable expenses from gross rent before calculating tax. Mortgage interest is treated separately via a 20% tax credit for individuals.
What's the property allowance?+
£1,000 per tax year. If your rental income is under this, you don't need to declare it. Above £1,000, you can use the property allowance instead of expenses, or claim actual expenses — whichever is more favourable.
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