Tax on Rental Income in the UK 2025-26
Landlords pay income tax on rental profits — not gross rent. Understanding which expenses you can deduct, and how the mortgage interest restriction works, is essential to calculating your real tax bill.
How Rental Income Tax Works
You pay income tax on your rental profit, not on the gross rent you receive. Rental profit is your total rental income minus allowable expenses. This profit is added to your other income (salary, dividends, etc.) and taxed at your marginal income tax rate — 20% basic rate, 40% higher rate, or 45% additional rate.
There is no separate "landlord tax" — rental income sits on top of your other income. If you earn £30,000 from employment and £10,000 in rental profit, your total income is £40,000. After the £12,570 Personal Allowance, you pay 20% basic rate on £27,430.
Allowable Expenses You Can Deduct
The following costs can be deducted from your gross rent to arrive at your taxable profit:
- Letting agent fees (typically 8-15% of rent for full management)
- Repairs and maintenance — fixing a broken boiler, repainting walls, replacing a broken window. Note: improvements are not deductible (installing a new extension or upgrading a standard kitchen to a luxury one counts as improvement, not repair)
- Buildings and contents insurance premiums
- Accountancy fees directly related to the rental business
- Ground rent and service charges on leasehold properties
- Advertising costs for finding tenants
- Council tax and utilities if you pay these during void periods
- Travel costs to inspect the property or supervise repairs (at HMRC mileage rates)
- Professional fees for eviction or lease renewal (not initial purchase costs)
Not deductible: mortgage capital repayments, your own time and labour, personal expenses, or costs relating to the purchase of the property.
Mortgage Interest: The Finance Cost Restriction
Since 2020-21, landlords can no longer deduct mortgage interest directly from rental income. Instead, HMRC provides a finance cost tax credit worth 20% of the mortgage interest paid. This change affects higher-rate and additional-rate taxpayers significantly.
Worked Example
Assume: £12,000 gross rent, £2,000 allowable expenses, £6,000 mortgage interest paid, salary elsewhere keeps you in the basic-rate band.
- Rental profit (before interest): £12,000 − £2,000 = £10,000
- Income tax on £10,000 at 20%: £2,000
- Finance cost credit: £6,000 × 20% = £1,200
- Final tax bill: £2,000 − £1,200 = £800
For a higher-rate taxpayer paying 40% on that £10,000, the tax before the credit would be £4,000, with the same £1,200 credit — leaving £2,800 in tax. A basic-rate taxpayer in the same situation pays only £800. This is why the mortgage interest restriction hit higher earners much harder.
Property Allowance
If your gross rental income is £1,000 or less per year, it is completely tax-free under the property allowance. This is useful for casual landlords earning small amounts — renting out a parking space or occasional short-term lets below this threshold. You cannot deduct expenses and claim the allowance at the same time; you choose whichever is more beneficial.
Rent a Room Scheme
If you rent a furnished room in your own home (where you live), you can earn up to £7,500 per year tax-free under the Rent a Room scheme. The relief is automatic for amounts below the threshold. If you earn more than £7,500, you declare the excess and pay tax on it, or opt out and declare actual profit instead. This scheme only applies to your main residence — not buy-to-let properties.
Capital Gains Tax on Sale
When you sell a rental property, any gain (sale price minus purchase price, minus allowable costs) is subject to Capital Gains Tax. For residential property in 2025-26:
- Basic-rate taxpayers: 18% on the gain
- Higher-rate taxpayers: 24% on the gain
- Annual Exempt Amount: £3,000 (2025-26)
You must report and pay CGT on property disposals within 60 days of completion via the HMRC online service — even if you also file a Self Assessment return.
Frequently Asked Questions
Do I need to register for Self Assessment as a landlord?
Yes. If your rental income exceeds £2,500 per year after allowable expenses, or your gross rental income is above £10,000, you must register for Self Assessment. Register via HMRC by 5 October following the end of the tax year in which you first received rental income.
Can I deduct mortgage interest on a buy-to-let?
Not directly. Since 2020-21, landlords receive a finance cost tax credit worth 20% of mortgage interest paid, rather than deducting interest as an expense. Basic-rate taxpayers are broadly unaffected; higher-rate taxpayers pay more tax than under the old system.
What is the Rent a Room scheme?
The Rent a Room scheme lets you earn up to £7,500 per year tax-free from renting a furnished room in your own home. It does not apply to buy-to-let properties or rooms in a home you do not live in.