If you let out a property, the rent you receive is taxable income, but you are not taxed on the rent itself. You are taxed on the profit, the rent left after allowable costs. How that profit is calculated, and one important quirk about mortgage interest, decides how much tax a landlord actually pays. This guide explains the mechanism: what counts as taxable rental income, which expenses you can deduct, how mortgage interest is treated differently from other costs, and the small-scale allowances that keep many casual landlords out of the system entirely.
We use round illustrative numbers throughout so the logic stays clear, then point you to a calculator for the live allowances and rates, which change from time to time.
You are taxed on profit, not rent
The starting point is rental profit, which is broadly the rent received minus allowable expenses for the same period. If a property earns £15,000 in rent and you incur £5,000 of allowable costs, your taxable rental profit is £10,000, not £15,000.
That profit is then added to your other income and taxed at your normal Income Tax rates. Rental profit sits alongside salary and other income, so a higher-rate taxpayer pays a higher rate on rental profit than a basic-rate taxpayer would on the same profit. There is no separate “landlord rate”; the profit simply flows into your overall Income Tax position. Our rental income tax calculator works the profit out from rent and expenses and applies your tax band.
What counts as an allowable expense
The general test is that an expense must be incurred wholly and exclusively for the purpose of renting out the property. Costs that pass this test reduce your taxable profit. Typical allowable expenses include:
- Letting agent and management fees.
- Repairs and maintenance that restore the property, such as fixing a boiler, repainting, or replacing a broken window. Note the distinction from improvements.
- Buildings and contents insurance.
- Ground rent, service charges, and council tax or utility bills that you pay rather than the tenant.
- Accountancy fees for the rental accounts and other professional costs.
A vital line runs between repairs and improvements. Repairs, putting something back to its original condition, are deductible against rental income. Improvements, making the property better than before such as building an extension, are capital costs. They are not deductible from rental profit, though they may reduce a future Capital Gains Tax bill when you sell.
The mortgage interest quirk
Here is the part that trips up many landlords. Mortgage interest on a buy-to-let is no longer a normal deductible expense for individual landlords. You cannot simply subtract it from rent to get profit, the way you can with insurance or agent fees.
Instead, mortgage interest is dealt with through a separate tax credit. In broad terms, your rental profit is calculated without deducting the interest, and then a tax reduction based on the interest is applied against your tax bill, at the basic rate. The mechanics matter because the two approaches do not produce the same result for everyone.
The effect of this change is felt most by higher-rate taxpayers. Under the old system, interest was deducted before tax, so relief effectively followed your top rate. Under the credit system, relief is given only at the basic rate, regardless of your tax band. A higher-rate landlord therefore gets less relief on the same interest than they used to, which can push the effective tax on a geared property up sharply. It also means a landlord can, in some cases, show a taxable profit even when their real cash flow after interest is thin. Modelling this properly, rather than assuming interest is a straight deduction, is essential, and our buy-to-let yield calculator helps you look at the return on a let property alongside its costs.
A worked illustration
Suppose a property earns £15,000 rent, has £3,000 of ordinary allowable expenses, and £6,000 of mortgage interest.
| Step | Amount |
|---|---|
| Rent | £15,000 |
| Less ordinary expenses | £3,000 |
| Taxable rental profit (interest not deducted) | £12,000 |
| Separate tax credit, based on £6,000 interest at the basic rate | reduces the final tax bill |
The £12,000 is taxed at your Income Tax rate, then the interest-based credit is subtracted from the tax due. For a basic-rate taxpayer the outcome is broadly similar to the old deduction. For a higher-rate taxpayer it is worse, because the credit is capped at the basic rate while the profit is taxed at the higher rate.
The property allowance
Not every landlord has to wade through all of this. A property allowance gives a tax-free slice of property income each year. If your total rental income for the year is within the allowance, you generally do not have to pay tax on it or even report it.
If your income is above the allowance, you can choose, for a given year, between deducting your actual expenses or simply deducting the property allowance as a flat figure instead. For landlords with very low expenses, claiming the flat allowance can beat itemising. For landlords with significant costs, deducting actual expenses usually wins. The choice is yours each year, and it pays to compare both.
Renting a room in your own home
There is a separate, more generous regime for letting a furnished room in the home you live in. The Rent a Room scheme provides a tax-free threshold for income from a lodger, well above the ordinary property allowance.
If your receipts from the lodger are within the Rent a Room threshold, the income is tax-free and need not be reported. Above it, you can choose between paying tax on the excess over the threshold or working out profit in the normal way, whichever is better for you. This scheme is aimed at owner-occupiers taking in a lodger, not at letting a separate property. Our rent a room calculator shows whether a lodger’s rent falls within the threshold and what, if anything, is taxable.
Reporting and paying
Rental profit above the relevant allowances is normally declared through Self Assessment, with the tax due by the usual deadlines. You keep records of rent received and expenses paid, work out the profit, apply the mortgage interest credit, and report the result.
Joint owners, such as a married couple owning a property together, usually split the rental profit between them, which can be tax-efficient if they are in different tax bands. The default split and the scope to change it depend on how the property is owned, so it is worth understanding before buying jointly.
Frequently asked questions
Am I taxed on all the rent I receive?
No. You are taxed on rental profit, which is the rent minus allowable expenses for the same period. The profit is then added to your other income and taxed at your normal Income Tax rate. There is no separate landlord tax rate; rental profit simply forms part of your overall taxable income.
Can I deduct my buy-to-let mortgage interest from the rent?
Not as a normal expense if you own the property as an individual. Interest is handled through a separate basic-rate tax credit instead of being deducted before tax. This gives less relief to higher-rate taxpayers than the old system did, and it can mean you show a taxable profit even when cash flow after interest is tight.
What is the difference between a repair and an improvement?
Repairs put the property back to its original condition, such as fixing a leak or replacing a broken appliance, and are deductible from rental profit. Improvements make the property better than before, such as adding an extension, and are capital costs that are not deductible from rental income, though they may reduce Capital Gains Tax when you sell.
Do I have to report a small amount of rental income?
Maybe not. A property allowance gives a tax-free slice of property income, and if your total rental income is within it, you usually need not report or pay tax on it. Letting a room in your own home falls under the more generous Rent a Room scheme, with its own higher tax-free threshold.