Rental income from buy-to-let properties is taxed as personal income in the UK — it sits on top of your employment income and is subject to the same marginal rates of 20%, 40%, and 45%. Understanding the allowable deductions, the mortgage interest restriction, and the Capital Gains Tax implications of property ownership is essential for any landlord who wants to accurately calculate their return on investment.
The tax landscape for UK landlords has changed significantly since 2017, particularly with the phased removal of mortgage interest relief (Section 24). Many landlords who previously operated profitably now find that their "paper profit" for tax purposes is higher than their actual cash profit — leading to unexpectedly large tax bills. This guide covers everything you need to know about landlord taxation in 26-27.
How is rental income taxed as a UK landlord?
Rental income is treated as earned income and taxed at your marginal rate. If you earn £50,000 from your day job and receive £12,000 in rental profit, the rental income sits on top of your salary — meaning it is taxed at 40% (since your salary already uses up the basic rate band to £50,270). The total income tax on your rental profit in this scenario is £4,800.
If property is your only income, the first £12,579 is covered by the Personal Allowance (no tax), then you pay 20% up to £50,270, 40% up to £125,140, and 45% above that. National Insurance is not charged on rental income (it is unearned income), which is a significant advantage over employment or self-employment.
Landlords with total income above £100,000 face the Personal Allowance taper — the £12,579 allowance is withdrawn at £1 for every £2 above £100,000. Rental profits push you further into this trap. A landlord earning £90,000 salary plus £15,000 rental profit has total income of £105,000, meaning £5,000 of Personal Allowance is withdrawn — creating an effective marginal rate of 60% on the rental income in the taper zone.
What is the £1,000 Property Allowance?
The Property Allowance works similarly to the Trading Allowance for self-employed income. If your gross property income (before expenses) is £1,000 or less per year, you do not need to tell HMRC about it or pay any tax. This covers occasional income such as renting a driveway, renting a room short-term, or other micro-income from property.
If your gross property income exceeds £1,000, you have two choices: deduct actual expenses (the standard approach for most landlords) or deduct the £1,000 flat allowance instead. You cannot use both — it is one or the other. For any serious rental property with mortgage interest, insurance, management fees, and repairs, actual expenses will almost always exceed £1,000.
Note that the Property Allowance is separate from Rent-a-Room Relief, which allows you to earn up to £7,500 tax-free from letting a furnished room in your main home. If you are renting out a spare bedroom rather than a separate property, Rent-a-Room Relief is usually more generous. The two reliefs cannot be combined for the same income.
What expenses can landlords deduct from rental income?
Allowable expenses reduce your taxable rental profit. They must be incurred "wholly and exclusively" for the letting business. The main categories are:
- Letting agent fees: commission charged by management companies (typically 8-15% of rent)
- Insurance: landlord buildings and contents insurance, rent guarantee insurance
- Repairs and maintenance: fixing boilers, repainting, replacing broken fittings (but not improvements)
- Ground rent and service charges: for leasehold properties
- Council tax and utilities: only during void periods when you pay them
- Accountancy fees: costs of preparing your property accounts and tax return
- Legal fees: for renewing tenancies or eviction proceedings (not the initial purchase)
- Travel costs: mileage to inspect the property or meet tenants (45p/mile by car)
- Replacement of domestic items: replacing furniture, appliances, and furnishings (like for like)
A critical distinction: repairs are deductible but improvements are not. Fixing a broken boiler is a repair (deductible). Replacing a working boiler with a better model is an improvement (capital expenditure — deductible only against CGT when you sell). HMRC scrutinises this boundary closely, so keep detailed records and photographs of the before/after state.
If you manage the property yourself rather than using a letting agent, you can still claim expenses for advertising, travel, and your time is implicitly reflected in the lower costs. However, you cannot pay yourself a "management fee" and deduct it — only payments to third parties are allowable.
How does the Section 24 mortgage interest restriction work?
Since April 2020, residential landlords can no longer deduct mortgage interest as an expense. Instead, you receive a tax credit (technically a "tax reduction") worth 20% of your finance costs. This means your taxable rental profit is calculated *before* deducting interest, and then you get a 20% credit back at the end.
For basic rate taxpayers paying 20% tax, this is neutral — you pay 20% on the profit including interest, then get a 20% credit, netting out the same. But for higher rate taxpayers at 40%, you pay 40% on profit but only get 20% back — a 20% real cost on every pound of mortgage interest. For additional rate taxpayers, the gap is 25%.
The practical impact is severe for highly geared properties. Consider a landlord earning £60,000 salary with a property generating £15,000 rent and £10,000 mortgage interest. Pre-Section 24, taxable profit was £5,000 (rent minus interest minus expenses). Post-Section 24, taxable profit is £15,000 minus other expenses (say £13,000), and the £10,000 interest only generates a £2,000 tax credit. The extra taxable income can also push you into a higher band or trigger the PA taper — creating a cascading tax effect.
What Capital Gains Tax applies when I sell a rental property?
When you sell a buy-to-let property, the gain (sale price minus purchase price minus allowable costs) is subject to Capital Gains Tax. Residential property attracts higher CGT rates than other assets: 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers. The Annual Exempt Amount of £3,000 can offset a small portion of the gain.
Allowable costs that reduce the gain include: the original purchase price, stamp duty paid on purchase, legal fees (buying and selling), estate agent fees on sale, and capital improvements made during ownership (extensions, conversions, not repairs). These can add up to tens of thousands and significantly reduce the taxable gain.
CGT on residential property must be reported and paid within 60 days of completion (not exchange). This is much faster than the normal Self-Assessment timeline and catches many sellers off guard. You report the disposal through HMRC's online CGT property disposal service and pay the estimated tax immediately. Any adjustment is reconciled on your Self-Assessment return later.
Do I need to register for Self-Assessment as a landlord?
Yes — if your gross property income exceeds the £1,000 Property Allowance, you must register for Self-Assessment and file a tax return each year. This applies even if you make a loss after expenses. You report your rental income on the UK Property pages (SA105) of the Self-Assessment return, detailing income, expenses, and the mortgage interest tax credit separately.
If you are already registered for Self-Assessment (perhaps because you are self-employed or earn over £150,000), you simply add the property pages to your existing return. The deadline for online filing is 31 January following the end of the tax year. If you have multiple properties, all UK rental income is reported together as a single rental business — you do not file separately for each property.
Losses from UK property can be carried forward and set against future property profits — but not against other income. If mortgage interest and expenses exceed your rental income, the loss carries forward until you have property profits to offset it. Keep meticulous records of losses, as they can take several years to utilise fully.
What are the key changes affecting landlords in 2026/27?
The Furnished Holiday Let (FHL) regime was abolished from April 2025, meaning short-term holiday lets no longer receive preferential tax treatment. Previously, FHL properties could claim capital allowances, were exempt from Section 24, and qualified for Business Asset Disposal Relief on sale. From 26-27, they are taxed identically to standard buy-to-lets — a significant disadvantage for holiday let owners.
The CGT Annual Exempt Amount has also been reduced to £3,000 (from £6,000 in 2023/24 and £12,300 before that). This means even modest gains on property sales are now taxable. For a property that has appreciated £100,000, the £3,000 exemption saves just £720 in tax — barely meaningful compared to the overall bill.
Looking ahead, Making Tax Digital for Income Tax (MTD ITSA) will eventually require landlords with qualifying income over £50,000 to submit quarterly digital updates to HMRC. While the full rollout date continues to shift, landlords should start keeping digital records now using compatible software to ease the transition.
How can I estimate my total landlord tax bill?
To estimate your tax, calculate your rental profit (rent minus allowable expenses, excluding mortgage interest), add it to your other income, and apply the marginal rates. Then subtract the 20% credit on your mortgage interest. For a landlord earning £45,000 salary with £10,000 rental profit and £6,000 mortgage interest: the £10,000 profit pushes total income to £55,000, taxed at 40% on the portion above £50,270. The mortgage interest credit is £1,200.
Use our calculator to model different scenarios. Enter your combined income (salary plus rental profit) to see the correct marginal rates. Remember to exclude mortgage interest from your expenses calculation and apply the credit separately — this is the most common error landlords make when estimating their bill.
For landlords considering whether to incorporate (operate through a limited company), the calculation is different — companies can still deduct mortgage interest in full, and pay Corporation Tax at 25% rather than personal income tax rates. See our sole trader vs limited company guide for a comparison of the structures.
Sources
- HMRC — Tax on rental income. Rental income taxed at marginal rates: 20%, 40%, 45%. Accessed July 2026.
- HMRC — Mortgage interest restriction (Section 24). Tax credit at 20% of finance costs. Accessed July 2026.
- HMRC — Capital Gains Tax rates. Residential property: 18% (basic rate), 24% (higher rate). Annual Exempt Amount: £3,000. Accessed July 2026.
- HMRC — Income Tax rates and Personal Allowances. Personal Allowance £12,579. Accessed July 2026.