Rental profit is added to your other income and taxed at your marginal rate of income tax: 20%, 40% or 45%. Since April 2020 mortgage interest cannot be deducted from that profit; instead a tax credit of 20% of the interest is set against the bill, which leaves basic rate landlords where they were and costs higher rate landlords 20p for every pound of interest. A landlord with £12,000 of rent, £2,000 of costs and £6,000 of interest keeps £3,200 after tax at the basic rate and £1,200 at the higher rate. Landlords with gross rents under £1,000 pay nothing under the property allowance.
How the profit is worked out
| Step | Example |
|---|---|
| Rent received in the tax year | £12,000 |
| Less allowable expenses, excluding mortgage interest | £2,000 |
| Taxable rental profit | £10,000 |
| Tax at your marginal rate | £2,000 at 20%, or £4,000 at 40% |
| Less 20% of mortgage interest | £1,200 on £6,000 of interest |
| Tax due | £800 at the basic rate, £2,800 at the higher rate |
Allowable expenses include letting agent and management fees, repairs and maintenance, landlord insurance, ground rent and service charges, accountancy, advertising, the cost of replacing furnishings and appliances, and any utilities or council tax the landlord pays. Improvements such as an extension or a new kitchen of a higher standard are capital costs, set against capital gains tax on sale rather than rental income; our capital gains tax guide covers that side. The rental income tax calculator works the bill from rent, costs, interest and your other income.
What Section 24 costs
| Landlord | Rent | Costs | Interest | Tax before 2017 rules | Tax now | Cash profit after tax |
|---|---|---|---|---|---|---|
| Basic rate, other income £30,000 | £12,000 | £2,000 | £6,000 | £800 | £800 | £3,200 |
| Higher rate, other income £55,000 | £12,000 | £2,000 | £6,000 | £1,600 | £2,800 | £1,200 |
| Higher rate, other income £60,000 | £18,000 | £3,000 | £9,000 | £2,400 | £4,200 | £1,800 |
The higher rate landlord in the second row makes £4,000 of real profit after interest and pays £2,800 of tax on it, an effective rate of 70%. Because the taxable figure ignores interest, the rule can also push a landlord across a threshold: rental profit before interest counts towards the £50,270 higher rate limit, the £60,000 High Income Child Benefit Charge and the £100,000 personal allowance taper, even where the cash profit is small or negative. The Section 24 calculator shows the extra tax for any rent, interest and income, and the rental yield calculator gives the gross and net return on the property’s value.
Allowances and reliefs
The property allowance exempts the first £1,000 of gross rental income; landlords with more can deduct £1,000 instead of their actual expenses where that is better. Rent-a-room relief exempts £7,500 a year of rent from a lodger in your own home, or £3,750 each for a couple. Replacement of domestic items relief allows the cost of a like-for-like replacement of furniture, appliances and carpets, but not the original purchase. The separate furnished holiday let regime, which allowed full interest deduction and other advantages, ended in April 2025, so holiday lets are now taxed like any other letting. Losses cannot be set against other income but carry forward against future rental profit.
Reporting and paying
Rental profit above £2,500 after expenses, or gross rents above £10,000, must be reported through Self Assessment, with the tax due by 31 January after the tax year and payments on account where the bill exceeds £1,000. Landlords whose combined gross rents and self-employment income exceed £50,000 have used Making Tax Digital quarterly reporting since April 2026, with the threshold falling to £30,000 in April 2027 and £20,000 in April 2028. Our Self Assessment guide sets out the calendar. Joint owners who are married or in a civil partnership are taxed 50:50 unless they own the property unequally and file Form 17; unmarried joint owners are taxed on their actual shares.
Buying through a company
A limited company deducts all its mortgage interest, pays corporation tax at 19% on profits up to £50,000 and 25% above £250,000 with marginal relief between, and its owners pay dividend tax on what they take out. That suits higher rate landlords with several properties who reinvest profits, and suits fewer people who need the income to live on, because the corporation tax and dividend tax together often exceed 40%. Company purchases also pay the 5% additional property stamp duty surcharge and cannot use the residential capital gains tax rates or the annual exempt amount on sale. Our corporation tax guide and dividend tax guide give the two layers, and the buy-to-let mortgage calculator shows what lenders will advance against the rent.
Common questions
How is rental income taxed? Rent less allowable expenses is added to your other income and taxed at 20%, 40% or 45%. Mortgage interest is not an expense; 20% of it is deducted from the tax instead.
What is Section 24? The rule, fully in force since April 2020, that replaced the deduction of finance costs with a 20% tax credit. It has no effect on basic rate landlords and costs higher rate landlords 20% of their interest.
Do I pay tax on rent under £1,000? No. The property allowance exempts gross rental income up to £1,000 a year, with no need to report it.
What expenses can a landlord claim? Agent fees, repairs, insurance, ground rent and service charges, accountancy, advertising, replacement furnishings and any bills the landlord pays. Not improvements, mortgage capital or the landlord’s own time.
When do I need to file a tax return? When rental profit exceeds £2,500 or gross rents exceed £10,000. Higher earners with gross rents over £50,000 report quarterly under Making Tax Digital.
Is it better to own rental property through a company? Often for higher rate taxpayers who reinvest profits, rarely for those who need the income, and never without accounting for the 5% stamp duty surcharge and the loss of personal capital gains reliefs.
Information, not tax advice. Rates and allowances are the published 2026/27 rules on gov.uk: renting out your property and gov.uk: tax relief for residential landlords; worked figures are from the site’s calculators for a single property. Take advice on your own position before acting on them.