An Essential Guide To Landlord Tax

There’s no guide to becoming a landlord. A lot of your role is dependent on the tenant and so you’re largely left to respond to situations as they arise. The same is not true of your…

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There’s no guide to becoming a landlord. A lot of your role is dependent on the tenant and so you’re largely left to respond to situations as they arise. The same is not true of your tax obligations, however – and HMRC won’t be lenient should you fail to disclose your rental income correctly.

While you’re busy figuring out how to prepare your property for a viewing, choosing between tenants and planning how to invest your anticipated rental income, HMRC expects you to be getting to grips with tax and expenses.

It can become a minefield if you’re not careful. And it’s for this reason we’ve provided you with an essential guide to landlord tax. Read on to discover how you can stay on the taxman’s good side as you’re letting property.

Is being a landlord classed as self-employed?

No, being a landlord doesn’t necessarily mean that you’re self-employed, which means that you won’t have to pay Class 2 National Insurance on your earnings.

However, there are circumstances where you will be classed as self-employed – specifically, if you have multiple properties, are actively looking to buy more properties, and it is your main source of income.

In this instance, you will need to make Class 2 National Insurance Contributions. For more examples of when you might be classed as a self-employed earner by HMRC, please visit the GOV.UK website.

Is rental income taxed differently than earned income?

No, it’s taxed through your Self Assessment by HMRC. They apply the same Income Tax rates as they do to those earning income through employment.

Yet rental income can be varied. While it is largely made up of the rent you receive, it also incorporates any additional payments made to you by tenants. In other words, if your tenants are charged for certain work performed by you (or a contractor hired by you), the money they give you is included in your total taxable income amount.

This work can include:

  • Property repairal work
  • Payment of utility bills
  • Cleaning of communal areas

Likewise, if you charge any non-refundable deposits to your tenants, these payments will be labelled as rental income. The same applies if you withhold finances from a returnable deposit at the end of a tenancy.

How much rental income is tax-free?

Your rental income is taxed based on your income as a whole. So if you have no other earnings, then you won’t be taxed on your rental income until you earn over your Personal Allowance, which currently stands at £12,500 (as of 2020/21).

However, if you’ll earn more than the Personal Allowance (either because you have earnings outside of rental income or your rental income exceeds this), then you will be subject to Income Tax according to the tax band you fall into. To give you an idea of what you can expect to be taxed, here are the current Income Tax brackets:

Amount of taxable incomeRate of tax
Up to £12,5000%
Between £12,501 and £50,00020% (basic rate)
Between £50,000 and £150,00040% (higher rate)
Over £150,00045% (additional rate)

You can find out more about tax bands here.

If you’re earning close to your Personal Allowance and are concerned that your rental income may well tip you over into the next bracket, your best opportunity to reduce your tax liability is to ensure you are claiming all your allowable expenses.

What expenses can I claim as a landlord?

Luckily for landlords there’s a wide range of expenses that you can claim for, regardless of the type of property you rent out. These include:

Utilities – Water, gas, electricity and even council tax can be claimed back provided that it’s you paying it.

Insurance – Like home insurance, landlord insurance covers your rental property and it can come in three forms: buildings, contents, and liability. All three can be claimed on.

Legal and accountancy fees – Should you use an accountant for your bookkeeping, you’ll be pleased to know their fees can be claimed. Likewise, if the tenant relationship sours, you can claim on legal support.

Letting agent fees – If you don’t have the time or resources to rent out a property yourself, any letting agent fees you incur may also count as expenses.

Once you’ve determined all the costs that you’re eligible to claim back on, you need to ensure that you log the relevant evidence of said costs in case HMRC asks for them.

How do I claim for expenses?

As your income needs to be disclosed to HMRC, you’ll be required to submit a Self Assessment tax return. It is here that you’ll also declare the total amount of allowable expenses made during the tax year.

If you’ve never registered for Self Assessment before, you can do so on the GOV.UK site. Be aware that the entire process can take up to several weeks, so it’s worth registering as soon as you’re able to. This gives yourself enough time to file ahead of the 31st January deadline.

Keeping hold of your receipts, invoices and bank statements will make this filing process much easier. With the correct information, you’ll ensure that you’re paying the right amount of tax and can properly justify the tax relief you wish to claim. Do that, and you’ll be square with HMRC.

How GoSimpleTax makes it even easier

Of course, if you’re working as well as letting out a property, you’ll hardly have the time to rigorously record your income and expenditure. There’s bound to be certain payments and expenses you simply can’t keep track of. But with our platform, you can easily log your finances as you go.

As our accounting software can be run on any device, you can keep track of your obligations from the palm of your hand. Upgrade to a full account and you can even log expenditure just by taking a photo of it. Sound good? Sign up for a free trial of our award-winning software today.

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02.
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