Income Tax on Rental Income
Rental income is added to your other income and taxed at your marginal rate — 20% (basic rate), 40% (higher rate), or 45% (additional rate). If your salary is £45,000 and your net rental income is £10,000, your total income is £55,000, pushing £4,730 into the higher-rate band (above the £50,270 threshold for 2024/25). That £4,730 is taxed at 40% rather than the 20% you might have expected.
You must report rental income through Self Assessment, even if you are employed and pay tax through PAYE. The deadline for paper returns is 31 October following the end of the tax year, or 31 January for online returns. Late filing triggers automatic penalties starting at £100. If your rental income exceeds £1,000 per year (the property income allowance), you must register for Self Assessment and file a return.
Scottish taxpayers face different income tax rates (19% starter, 20% basic, 21% intermediate, 42% higher, 45% advanced, 48% top rate for 2024/25), which affects the calculation. Welsh taxpayers currently pay the same rates as England.
Section 24: Mortgage Interest Relief Restriction
Section 24 of the Finance (No.2) Act 2015 changed how landlords claim relief on mortgage interest. Before April 2017, mortgage interest was a deductible expense — you subtracted it from rental income before calculating tax. This was phased out between 2017 and 2020. Since April 2020, mortgage interest is no longer deductible. Instead, you receive a tax credit equal to 20% of your mortgage interest payments.
For a basic-rate taxpayer, the effect is neutral — you previously deducted at 20%, and now you get a 20% credit. For a higher-rate taxpayer, the impact is severe. Consider a property with £15,000 annual rent and £10,000 annual mortgage interest. Under the old rules, taxable profit was £5,000, taxed at 40% = £2,000. Under Section 24, you are taxed on £15,000 at 40% = £6,000, then receive a 20% credit on £10,000 = £2,000, leaving a tax bill of £4,000 — double the previous amount.
Worse still, Section 24 can push landlords into a higher tax band. Because the full rental income (before mortgage interest) is counted as taxable income, a basic-rate taxpayer with multiple properties can be pushed into the higher-rate band on paper, even though their actual cash profit is much lower. This can also affect eligibility for child benefit (the High Income Child Benefit Charge applies above £60,000) and personal allowance tapering (above £100,000).
| Pre-Section 24 | Post-Section 24 | |
|---|---|---|
| Rental income | £15,000 | £15,000 |
| Mortgage interest | £10,000 | £10,000 |
| Taxable income (40% band) | £5,000 | £15,000 |
| Tax at 40% | £2,000 | £6,000 |
| 20% tax credit on interest | N/A | −£2,000 |
| Final tax bill | £2,000 | £4,000 |
Allowable Expenses
You can deduct legitimate expenses from your rental income before calculating tax. Allowable expenses include letting agent fees, insurance premiums (landlord, buildings, contents), repairs and maintenance (but not improvements), ground rent and service charges (for leasehold properties), accountancy fees, legal fees for tenancy agreements, advertising for tenants, utility bills (if you pay them), and council tax (during void periods).
The distinction between repairs and improvements is critical. Replacing a broken boiler with a similar model is a repair (deductible). Upgrading from a basic boiler to a premium model with additional features could be partly classified as an improvement (the improvement element is not deductible but adds to your base cost for CGT purposes). Replacing a kitchen on a like-for-like basis is a repair; installing a kitchen where there was none is an improvement.
The Replacement of Domestic Items Relief allows you to claim the cost of replacing furnishings (furniture, appliances, kitchenware) in a furnished let, less any proceeds from the old item. This replaced the old Wear and Tear Allowance, which gave a flat 10% deduction. You can only claim for replacements, not for initial furnishing of a property.
- ▸Deductible: Letting agent fees, insurance, repairs, accountancy fees, legal fees, advertising, ground rent, service charges
- ▸Not deductible: Mortgage capital repayments, cost of buying the property, personal expenses, clothing, travel to the property (unless you have multiple properties)
- ▸Partially deductible: Mortgage interest (20% tax credit only), improvements (capital expenditure, added to base cost for CGT)
Capital Gains Tax on Disposal
When you sell a buy-to-let property, you pay Capital Gains Tax on the profit (sale price minus purchase price, minus allowable costs, minus your annual CGT exemption). Residential property CGT rates are 18% for gains falling within the basic-rate band and 24% for gains in the higher-rate band. The annual CGT exemption is £3,000 for 2024/25.
Allowable costs include purchase costs (stamp duty, solicitor fees, survey costs), sale costs (estate agent fees, solicitor fees), and capital improvements (but not repairs). If you spent £15,000 on an extension, this reduces your taxable gain. If you spent £5,000 on roof repairs, this is a revenue expense deducted from rental income, not a capital cost.
You must report the disposal and pay CGT within 60 days of completion, using the 'Report and pay Capital Gains Tax on UK property' service on GOV.UK. This is a separate requirement from your annual Self Assessment return — you report on the 60-day return and then include the gain again on your annual return (with credit for tax already paid). Late reporting triggers penalties and interest.
Stamp Duty Land Tax Surcharge
Buy-to-let properties attract the additional property surcharge, currently 5% on top of standard SDLT rates (increased from 3% in October 2024). This applies to the full purchase price from the first pound. A £300,000 buy-to-let purchase incurs SDLT of approximately £19,500, compared to £2,500 for a standard purchase or £0 for a qualifying first-time buyer.
The surcharge applies if you already own (or are treated as owning) another residential property at the end of the day of purchase. There are limited exceptions: if you are replacing your main residence (and sell the old one within 36 months), the surcharge is refundable. But for a straightforward buy-to-let purchase alongside your own home, the surcharge is unavoidable.
SDLT is not a deductible expense for income tax purposes, but it is an allowable cost for CGT when you eventually sell the property. This means it reduces your capital gain — a £15,000 SDLT bill on purchase reduces your CGT-liable gain by £15,000 when you sell.
Incorporation: Using a Limited Company
Many landlords now buy through a limited company to avoid Section 24. Companies pay Corporation Tax (currently 25% for profits over £250,000, 19% for profits under £50,000, with a marginal rate between) and can deduct mortgage interest in full as a business expense. There is no Section 24 restriction for companies.
However, incorporation has trade-offs. Extracting money from the company triggers dividend tax (8.75% basic rate, 33.75% higher rate, 39.35% additional rate). Mortgage products for company buy-to-lets typically carry higher interest rates (0.5% to 1% above personal rates) and require personal guarantees. Annual company administration (accounts, confirmation statement, corporation tax return) adds £500 to £1,500 in accountancy fees.
Transferring existing properties from personal ownership to a company is treated as a disposal for CGT purposes and a purchase for SDLT purposes — meaning you pay CGT on any gain and full SDLT (including the surcharge) on the transfer. This makes incorporation of an existing portfolio expensive and often impractical unless the portfolio is large enough to justify the costs over time. For new purchases, buying through a company is increasingly common and may be tax-efficient depending on your personal circumstances.
Key Takeaways
- ✓Rental income is taxed at your marginal rate — higher-rate taxpayers pay 40% on every pound of rent above the threshold
- ✓Section 24 means mortgage interest is no longer deductible — you receive only a 20% tax credit, which hits higher-rate taxpayers hardest
- ✓CGT on residential property is 18% (basic rate) or 24% (higher rate) — report and pay within 60 days of completion
- ✓The 5% SDLT surcharge on buy-to-let purchases significantly increases upfront costs but is deductible for CGT when you sell
- ✓Company ownership avoids Section 24 but adds complexity and cost — take specialist advice before choosing a structure