How rental income tax works

Like virtually any other stream of income, monies raised from renting out property or land need to be declared to HMRC. Regardless of whether your buy to let business is generating a profit or loss, you must inform the taxman.

Rental income is declared on your annual tax return in the same way you would report any other earnings. On the tax return form you need to enter the income (the total amount charged as rent), and the expenses of maintaining the property. By subtracting the expenses from the income you will be able to calculate the profit – this is the figure on which you will be charged rental income tax.

At the basic rate of tax, you will be charged 20% of your profit over the course of the financial year. Obviously if you pay the higher rate of tax (40%), income will be chargeable at the higher rate. On the plus side, National Insurance is not applied to rental income.

If you rent a house for £1000 per calendar month and this forms your only income, you can expect to be taxed on 20% of your annual takings, less your personal tax allowance. So for the tax year 2014-2015 this would equate to:

Income = £12,000
Personal allowance = £10,000
Taxable income = £12,000 – £10,000 = £2,000

You would then owe HMRC 20% of this final figure = £400

However, this rough calculation does not account for any expenses of running the property – you may end up owing nothing at all by the end of the year. Rental income tax is also calculated differently if you are holding your property within a limited company.

It is also important to remember that any earnings above £4,250 raised from renting to a lodger in your own home will also need to be reported. The £4,250 is known as the “Rent-A-Room” relief.