Tax on Rental Income UK: Complete Guide 2026/27

Overview: Rental Income and Tax

In the UK, rental income is treated as a distinct source of income and is subject to Income Tax at your marginal rate — 20%, 40% or 45%. It is added to all your other income (salary, dividends, pension etc.) when calculating which rate band applies.

As a landlord you are taxed on your net rental profit — the income left after deducting allowable expenses and (via a tax credit) the restricted element of finance costs. You are not taxed on gross rent received.

The tax year runs from 6 April to 5 April. If you own multiple rental properties, all are pooled together into a single property income account — profits and losses from individual properties are offset against each other.

Property Income Allowance (£1,000)

If your total gross rental income in a tax year is £1,000 or less, you are fully covered by the property income allowance and pay no tax. You do not need to report this to HMRC and you do not need to register for self-assessment on account of this income alone.

If your gross rental income is above £1,000, you can choose either to deduct the £1,000 allowance from gross income, or to deduct your actual expenses in the normal way. You would generally deduct actual expenses — but the £1,000 allowance can be useful if your expenses are very low.

Allowable Expenses

You can deduct certain running costs from your rental income before calculating your taxable profit. To be deductible, an expense must be wholly and exclusively incurred for the purposes of the rental business.

Fully allowable expenses include:

• Letting agent fees — management, tenant-find, renewal fees
• Landlord insurance — buildings, contents, public liability
• Repairs and maintenance — restoring the property to its original condition (not improvements)
• Accountancy fees — for preparing rental accounts and self-assessment returns
• Legal fees — for drawing up tenancy agreements, eviction proceedings (not for acquiring the property)
• Council tax, water rates, gas and electricity — when you pay these rather than the tenant
• Ground rent and service charges — on leasehold properties
• Advertising costs — to find new tenants
• Travel costs — for visiting the property to carry out inspections or organise repairs (at HMRC's approved mileage rate)
• Safety certificate costs — gas safety, electrical inspection (EICR), EPC
• Professional subscriptions — landlord associations, property management software

What you cannot deduct:

• Capital expenditure — improvements that add value (e.g. an extension, a new kitchen that is significantly better than the original)
• Mortgage capital repayments — repaying the principal of your loan is not an allowable expense
• Mortgage interest — no longer deductible as an expense (see Section 24 below)
• Personal expenses — any private use element of an expense must be apportioned

Section 24: Finance Cost Restriction

The Section 24 rules, fully phased in from April 2020, are one of the most significant tax changes to affect UK landlords in decades. They restrict the tax relief available on finance costs — primarily mortgage interest.

How it works

Under the old rules (before 2017), you could deduct mortgage interest in full as an expense against rental income. Under Section 24:

1. You calculate your rental profit without deducting any finance costs
2. You pay Income Tax on this higher profit at your marginal rate
3. You then receive a 20% tax credit equal to 20% of your total finance costs

Who is affected?

For a basic rate taxpayer (20%), the effective result is the same as before — you pay 20% tax on the rental profit including finance costs, then recover 20% of the finance costs. Net result: no change.

For a higher rate taxpayer (40%), the impact is significant. You now pay 40% tax on the profit that includes finance costs, but only recover 20% of those costs. The effective tax rate on the finance cost element is 20% (40% paid − 20% credit).

Additionally, if the rental income pushes you into a higher rate band or reduces personal allowance (income over £100,000 loses personal allowance at 50p per £1), the impact is even greater.

Replacement of Domestic Items Relief

You cannot claim wear and tear allowance on furnished rental properties — that was abolished in April 2016. Instead, you can claim the replacement of domestic items relief for the cost of replacing (not upgrading) domestic items provided for tenants' use.

Qualifying items include beds, sofas, carpets, curtains, white goods, crockery and cutlery. You claim the cost of the replacement item on a like-for-like basis — if you replace a basic dishwasher with a premium one, you can only claim the cost of a comparable basic model, with the excess treated as an improvement.

You cannot claim for the initial purchase of items when first letting the property — only for replacements.

Self-Assessment: How to Report

Most landlords must complete a self-assessment tax return. You need to register if your rental income exceeds £2,500 per year after expenses, or £10,000 or more before expenses.

Register for self-assessment via HMRC's online service. You must register by 5 October following the end of the tax year in which you first receive rental income.

On your return, you complete the UK Property supplementary pages (SA105). Report total rental income received, all allowable expenses, and your finance costs separately. HMRC calculates the 20% tax credit on the finance costs automatically.

Capital Gains Tax on Disposal

When you sell a rental property, any gain above the annual exempt amount is subject to Capital Gains Tax (CGT) at the residential property rates:

• 18% if you are a basic rate taxpayer (and the gain does not push you into the higher rate band)
• 24% if you are a higher or additional rate taxpayer, or if the gain pushes you into higher rate territory

The annual exempt amount for 2026/27 is £3,000. Each individual has their own allowance — a jointly owned property can use both allowances (£6,000 total).

Your capital gain is calculated as: Sale price − Original purchase price − Allowable purchase and sale costs − Capital improvements.

Allowable costs include stamp duty paid on purchase, solicitor fees on purchase and sale, surveying fees, estate agent fees on sale, and capital improvements (not repairs and maintenance).

Private Residence Relief

If the property was your main home for part of your ownership, Private Residence Relief (PRR) exempts those years of ownership from CGT. The last nine months of ownership are always exempt if the property was ever your main residence, regardless of whether you lived there at the end.

The 30-Day CGT Reporting Rule

Since 6 April 2020, you must report a UK residential property gain and pay any CGT owed within 30 days of completion using HMRC's online residential property reporting service. This is a separate, standalone obligation — it does not replace your self-assessment return.

You will then also include the disposal on your annual self-assessment tax return, where any overpayment or underpayment of CGT is reconciled.

Non-Resident Landlords

If you live outside the UK and let UK property, you fall under the Non-Resident Landlord (NRL) scheme. Letting agents or tenants paying rent above £100/week must deduct basic rate tax (20%) at source and pay it to HMRC, unless you have received HMRC approval to receive rent gross (by applying through form NRL1).

Non-resident landlords still file UK self-assessment returns and claim allowable expenses in the normal way. Any overpaid tax is refunded via the return.

Worked Examples

Record Keeping

HMRC requires you to keep records for at least 5 years after the 31 January self-assessment filing deadline for the relevant tax year. For property sold after 2020, you should also keep records related to the 30-day CGT return.

Records to maintain:

• Tenancy agreements and renewal letters
• Bank statements showing rent received
• All invoices and receipts for expenses
• Mortgage statements showing annual interest charged
• Records of any capital improvements (separate from repair invoices)
• Purchase documents for the property (for eventual CGT calculation)

Frequently Asked Questions