Rental Income Tax 2026/27

Tax on Rental Profits

Rental income tax is charged on your net rental profit — your total rental income minus allowable expenses for the tax year. This net profit is added to your other income (employment, self-employment, savings, dividends) and taxed at your marginal income tax rates: 20% basic rate, 40% higher rate, or 45% additional rate for the 2026/27 tax year. If you have a mortgage on the rental property, the treatment of finance costs has changed significantly since 2017 under Section 24 of the Finance Act 2015. Mortgage interest is no longer deductible from rental income to arrive at net profit. Instead, you receive a tax reduction equal to 20% of your finance costs (interest element only), meaning higher-rate and additional-rate taxpayers cannot deduct the full interest cost at their marginal rate. This restriction applies to all residential landlords, whether they own properties personally or in partnership, but does not apply to furnished holiday lettings or commercial property. The restriction has made buy-to-let less tax-efficient for higher-rate taxpayers, leading many landlords to consider incorporating into a limited company to avoid the restriction.

Allowable Expenses

You can deduct a wide range of expenses from your rental income to arrive at your net profit. Allowable expenses include: repairs and maintenance — the cost of repairing the property but not improvements (improvements are capital expenditure and may attract Capital Gains Tax relief when you sell); insurance — buildings, contents, and landlord liability insurance; professional fees — letting agent fees, accountant fees, and legal fees relating to the rental business (but not legal fees for buying or selling the property); utilities and council tax — if you pay these on behalf of tenants; service charges and ground rent — for leasehold properties; cleaning and gardening — between tenancies or if included in the tenancy agreement; advertising for tenants — including online listings and signboards; travel expenses — for visiting the property to inspect or carry out repairs, but only the actual cost of travel (HMRC does not allow a mileage claim for rental property as it does for self-employment); replacement of domestic items relief — for replacing furnishings, appliances, and kitchenware (not the initial cost, but the cost of replacing existing items, with a deduction for any private use). Capital expenditure such as extensions, loft conversions, or adding a new bathroom is not deductible against rental income. These costs are added to the cost base for Capital Gains Tax purposes when you sell the property.

Property Allowance (£1,000)

If your gross rental income is £1,000 or less in a tax year, you do not need to report it to HMRC or pay any tax. This is the property allowance, a tax-free trading allowance of £1,000 that applies to property income. If your gross rental income exceeds £1,000, you can choose between two methods for calculating your taxable profit: deducting your actual allowable expenses from your rental income, or claiming the £1,000 property allowance instead of deducting expenses. You cannot use the property allowance if you are using the Rent a Room scheme for the same property. If you claim the property allowance, you simply declare £nil profit if your income is £1,000 or less, or declare gross income minus £1,000 if your income exceeds £1,000. This is beneficial when your actual allowable expenses are less than £1,000, as the £1,000 allowance gives a larger deduction. For joint owners (husband and wife, civil partners, or business partners), each owner can claim their own £1,000 property allowance against their share of the rental income, potentially giving £2,000 of tax-free rental income for a couple. The election between actual expenses and the property allowance must be made each tax year — you can switch between methods annually.

Mortgage Interest Restriction (Section 24)

The mortgage interest restriction introduced by Section 24 of the Finance Act 2015 applies from 2017/18 onwards. Under this restriction, finance costs (including mortgage interest, arrangement fees, and early repayment charges) are not deducted from rental income. Instead, you receive a tax reduction equal to 20% of your finance costs. This tax reduction is deducted from your income tax liability, not from your rental profit. For basic-rate taxpayers, the overall effect is neutral — the 20% tax reduction equals the tax saved by deducting interest at 20%. For higher-rate (40%) and additional-rate (45%) taxpayers, the restriction is costly: they only receive a 20% tax reduction instead of saving tax at their marginal rate. For example, if you have £10,000 of mortgage interest and are a higher-rate taxpayer, under the old rules you would have saved £4,000 in tax. Under the new rules, you receive only a £2,000 (20%) tax reduction — a loss of £2,000. The finance cost tax reduction is calculated as 20% of the lower of: your finance costs for the year, your net property income (after all other deductions), or your total income (after personal allowance and other reliefs). Any unused finance costs can be carried forward to future tax years. This restriction does not apply to furnished holiday lettings, commercial properties, or properties held through a company.

Reporting on SA105

Rental income is reported on the SA105 UK property pages of the Self Assessment tax return. If you are already registered for Self Assessment, you can complete the SA105 online through HMRC's digital tax service. The SA105 requires details of: total rental income from all properties (including furnished holiday lettings if applicable), total allowable expenses (with breakdowns for repairs, insurance, professional fees, and other categories), finance costs (mortgage interest) claimed for the basic rate tax reduction, and net rental profit or loss. If you have multiple rental properties, you must aggregate all income and expenses on a single SA105 — you do not complete a separate page for each property. Losses from one property can offset profits from another in the same tax year. If you have an overall rental loss, it can be carried forward to offset against future rental profits (but not against other income). The filing deadline is 31 January following the end of the tax year (so for the 2026/27 tax year, the deadline is 31 January 2028). Interest and penalties apply for late filing or late payment. If you also have furnished holiday lettings, these are reported on a separate section of the SA105, as they are treated differently for certain tax purposes (capital allowances, business asset disposal relief, and the mortgage interest restriction exemption).

Joint Ownership and Rental Income

When a property is owned jointly, the rental income is split between the owners for tax purposes. For married couples and civil partners who own property as joint tenants (equal shares), rental income is automatically split 50:50. If you own as tenants in common (unequal shares), you can elect to split rental income according to your actual beneficial ownership by making a Form 17 election to HMRC within 60 days of the change in ownership. Without a Form 17 election, the income is split 50:50 regardless of actual ownership shares. For unmarried joint owners, rental income is split according to their beneficial ownership shares. If no election is made, HMRC will generally treat the income as split equally. Joint ownership planning is an important consideration for higher-rate taxpayer couples, as transferring ownership to a lower-earning spouse can save significant tax. However, such transfers must be genuine and unconditional to be effective for tax purposes. HMRC has anti-avoidance rules that can challenge arrangements where the driving reason is tax avoidance. Always seek professional advice before restructuring property ownership to ensure compliance with HMRC rules and to understand the Capital Gains Tax and Stamp Duty Land Tax implications of any transfer.

FAQs

Do I need to register for Self Assessment to report rental income?

If your gross rental income exceeds £1,000 in a tax year, you must register for Self Assessment and report your rental income on the SA105 property pages. You can register online at GOV.UK.

Can I deduct mortgage capital repayments from rental income?

No. Only the interest element of your mortgage payment is allowable. Capital repayments are not deductible and must be paid from your net income after tax.

What happens if my rental expenses exceed my rental income?

You make a rental loss. This loss can be carried forward to offset against future rental profits from the same property business. You cannot offset a rental loss against other income such as employment or self-employment.

Can I use the property allowance if I have multiple properties?

Yes, the £1,000 property allowance applies to your total property income from all properties. You cannot claim £1,000 per property. If your total gross rental income exceeds £1,000, you can choose between actual expenses or the £1,000 allowance for all your properties together.