Calculating Tax Owed On Rental Income

As with any sort of income producing venture, there is always the expectation that you will be required to claim this income in order to pay taxes on the rental property.  A residential letting is considered to be running your own business, whether you have one rental property or several, they are all considered to be a single business.

Property rentals can be calculated in two ways, according to the HM Revenue & Customs. If you are only renting out a furnished part of your own home to a lodger, you could be eligible under the “Rent a Room” Scheme, in which £4,250 per year or below (£2,125 if you are renting together) of your total receipts is considered the tax-free portion.  You would then pay tax on the amount over £4,250.  The down side to this particular scheme is that you may not claim expenses for this rental income.

The second more popular way of calculating tax owed on rental properties is the “Residential Lettings” version which is basically taking the total of your income, subtracting the total of your eligible expenses to come up with your Net Profit.  One of the advantages to this scheme is the fact that if you have several rental properties, you can offset a loss from one property against the profit of other rental properties.  Not to mention that being able to claim expenses will usually bring your taxable income down considerably.

How much tax you will pay is dependent on the total amount of taxable income from all sources.  Therefore, if you also have a job outside of the property rentals, you will be required to add the incomes together.

It will however be up to you as to which scheme works best for your situation.
This is just a basic guide to figuring out how to calculate the tax, but as with any tax matters, there are many exceptions, allowances and changes to the taxation rules, so it is always advisable to check out the rulings with HM Revenue & Customs in order for you to make an informed decision with no surprises down the road.

No matter how you decide to run your property rental business, remember that as a business owner you are responsible for keeping accurate and detailed records for each of your property rentals.  HM Revenue & Customs can ask to see your records along with any supporting documentation at any time, and for up to six years.

The information you will need to keep record of is:

–         All of the rental income you received along with dates you rented the property

–         All income received for services provided to tenants

–         All business expenses

–         Bank statements and any invoices, receipts or rent books

Having a rental income property can be a very rewarding and enjoyable experience – you just need to be prepared and do your research ahead of time.



Figures in this article were correct on the date of publishing – these figures are subject to change so they should not wholly be relied upon. Accurate and up to date information relating to tax calculation can be found by visiting the official HMRC website.

1 Comment to “Calculating Tax Owed On Rental Income”

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