Yes, you pay income tax on rental income in the UK

If you own a property and receive rent from tenants, that rental income is taxable. You report it to HMRC (Her Majesty's Revenue and Customs) and pay income tax on the profit you make — that is, the rent minus your allowable expenses. The tax rate depends on your total income and whether you are a basic-rate, higher-rate, or additional-rate taxpayer.

You must report rental income even if you only rent out a single room or a garage. There is no minimum income threshold that lets you avoid reporting. If you fail to declare rental income, HMRC can issue penalties and demand back taxes with interest.

Key Takeaways

  • Rental income is taxable in the UK, and you report it to HMRC on your Self Assessment tax return each year.
  • You only pay tax on profit — the rent you receive minus allowable expenses like mortgage interest, repairs, insurance, and council tax.
  • Mortgage principal repayments and capital improvements do not count as expenses, so they do not reduce your taxable profit.
  • If you have a mortgage, you can claim relief on the interest portion only, not the full payment, and the rules changed in 2017 for higher-rate taxpayers.
  • Furnished holiday lets and corporate-owned rentals have different tax rules and may offer different reliefs.

What counts as an allowable expense

You can deduct costs that are directly connected to running the rental property. Common allowable expenses include mortgage interest (not the principal), council tax, water rates, buildings insurance, contents insurance, repairs and maintenance, cleaning and gardening, letting agent fees, accountant fees, and advertising for tenants.

You can also deduct utilities you pay on behalf of tenants, ground rent if you lease the property, and costs of replacing furnishings and equipment. However, you cannot deduct the cost of major improvements or capital works — for example, building an extension or replacing the entire roof counts as a capital improvement, not a repair, and does not reduce your taxable income in the year you spend the money.

The distinction between repair and improvement matters. Repainting a wall is a repair; rewiring the entire house is an improvement. If you are unsure, HMRC publishes guidance on what counts as capital expenditure. Keep receipts and invoices for all expenses you claim, because HMRC can ask to see them.

How mortgage interest relief works after 2017

Before April 2017, all landlords could deduct the full mortgage interest payment from their rental income. The rules changed for higher-rate and additional-rate taxpayers. Now, basic-rate taxpayers can still deduct all mortgage interest, but higher-rate and additional-rate taxpayers receive a tax credit instead of a direct deduction.

If you are a higher-rate taxpayer, you calculate your taxable profit using the full mortgage interest as an expense, but then HMRC gives you a tax credit equal to 20 percent of the interest you paid. This means you get relief at the basic rate (20 percent) rather than your marginal rate (40 or 45 percent). The change was phased in gradually between 2017 and 2020, and by April 2020 the new rules applied fully.

This matters because it can push you into a higher tax bracket. If your rental profit plus other income puts you over the higher-rate threshold, you will pay 40 percent tax on some of your profit, but only get 20 percent relief on the mortgage interest. Many landlords found their tax bills rose significantly after 2017.

Reporting rental income to HMRC

You report rental income on your Self Assessment tax return, which you file with HMRC each year. The important date is usually 31 January following the end of the tax year (5 April). If you do not normally file a tax return but have rental income, you must register for Self Assessment.

HMRC provides a property income form (SA105) as part of the Self Assessment package. You list your total rental income for the year and all allowable expenses, then calculate the profit. If you use an accountant, they will usually complete this form for you. If you file online through HMRC's website or software, the form is built into the system.

You must keep records of all rental income and expenses for at least six years. This includes bank statements, invoices, receipts, and tenancy agreements. If HMRC opens an inquiry into your tax return, they will ask to see these records.

Capital gains tax when you sell a rental property

When you sell a rental property, you may owe capital gains tax on the profit you made between purchase and sale. Capital gains tax is separate from income tax and applies to the increase in the property's value, not the rent you collected.

However, if the property is your main residence, you are usually exempt from capital gains tax on the sale. If it is a buy-to-let property or a second home, you will owe capital gains tax on any gain above the annual exemption (which varies each year). The rate is 20 percent for higher-rate taxpayers and 10 percent for basic-rate taxpayers.

You do not owe capital gains tax on the cost of improvements you made to the property — those costs reduce your taxable gain. But you do owe tax on the increase in the property's market value since you bought it.

Furnished holiday lets and special rules

If you rent out a property as a furnished holiday let — meaning it is available for short-term holiday lets for at least 140 days per year and actually let for at least 70 days — you may be taxed differently. Furnished holiday lets can claim capital allowances on furnishings and equipment, which standard rental properties cannot. They may also may have access to for different reliefs and can use loss relief differently.

The rules for furnished holiday lets are complex and depend on how many days the property is available and actually let. If you think your property might may have access to, speak to an accountant or contact HMRC directly, because getting the classification right can save you money.

What happens if you do not report rental income

HMRC has data-matching systems that track property ownership and can cross-reference bank deposits against known rental properties. If you receive rental income and do not report it, HMRC can discover the omission through these checks or through a tip-off from a tenant or letting agent.

Penalties for not reporting rental income start at 30 percent of the unpaid tax if the omission was careless, and can reach 100 percent if HMRC considers it deliberate. You will also owe the unpaid tax itself plus interest, calculated from the date the tax was due. The total bill can easily double or triple the original tax owed.

Frequently Asked Questions

Do I pay tax if I rent out just one room in my home?

Yes, you must report the income. However, if you rent out a room in your main residence, you may may have access to for Rent a Room Relief, which allows you to receive up to £7,500 per year tax-free (or £3,750 if you share the income with another person). You must claim this relief on your tax return.

Can I claim a loss on my rental property against other income?

If your expenses exceed your rental income in a year, you have a loss. You can carry the loss forward to offset future rental profits, but you cannot usually claim it against other income like salary or pension. Furnished holiday lets have different rules and may allow loss relief against other income.

What if I have a mortgage and the interest rate rises?

You can claim the actual interest you paid in that year as an expense (or as a tax credit if you are a higher-rate taxpayer). If your interest payments rise because rates rise, your allowable expense rises too, which reduces your taxable profit. This is one reason landlords' tax bills can fall when interest rates increase.

Do I owe tax on the rent if my tenant does not pay?

You report rent on a receipts basis, meaning you only pay tax on money you actually receive. If a tenant does not pay, you do not owe tax on that unpaid rent. However, you also cannot claim a deduction for the unpaid amount. If you eventually recover the money, you report it in the year you receive it.

What is the difference between income tax and capital gains tax on a rental property?

Income tax applies to the rent you collect each year. Capital gains tax applies to the profit you make when you sell the property. Both can explore to the same property in different years — you pay income tax annually on rent, and capital gains tax once when you sell.