UK Income Tax on Rental Income

Calculation of income tax on rental income is based on the yearly rental income minus deductible expenses*.
Any profit derived will be set off against your personal allowance of £11,500.
The balance (taxable income) is then subjected to income tax of 20%.

Example 1:
You purchase a 1-bed unit for £105,000 and rent it for £625 each month.
You pay a letting agent 6% of rent to manage the tenancy and your service charges
and ground rent is £550 and £350 each year. You budget 5% of rental income for
maintenance.

Calculation:
Rental income: £7,500
Less:
Letting agent fees: (£450)
Service charges: (£550)
Ground rent: (£350)
Maintenance: (£375)
Profit: £5,775 / year

Annual profit of £5,775 is within your£11,500 annual tax-free allowance. You pay
£0.00 income tax.

Example 2:
You purchase a 2-bed unit for £170,000 and rent it for £900 each month.
You pay a letting agent 6% of rent to manage the tenancy and your service charges
and ground rent is £1,020 and £350 per year. You budget 5% of rental income for
maintenance.

Calculation:
Rental income: £10,800
Less:
Letting agent fees: (£648)
Service charges: (£1,020)
Ground rent: (£350)
Maintenance: (£540)
Profit: £8,242 / year

Annual profit of £8,242 is within your £11,500 annual tax-free allowance. You pay
£0.00 income tax.

Example 3:
You have a rental income of £21,600 from a 2-bed unit.
You incur letting agent fees of £1,296 for managing the tenancy.
Your service charges and ground rent is £1,296 and £700 per year.
Your maintenance fees for the year are £1080.

Calculation:
Rental income: £21,600
Less:
Letting agent fees: (£1,296)
Service charges: (£2,040)
Ground rent: (£700)
Maintenance: (£1080)
Profit: £16,484 / year

Annual profit is £16,484 which is above your£11,500 annual tax-free allowance.

Calculation of income tax:
20% Profit: £16,484
Less:
Personal allowance: (£11,500)
Total taxable income: £4,984

£4,984 x 20%: £997 / year
You pay £997 income tax this year.

Note: If you buy the property with your spouse, you each receive the personal
allowance of £11,500.
You therefore pay zero income tax.

* Deductible expenses:
– water rates, council tax, gas and electricity
– contents insurance
– costs of services, including the wages of gardeners and cleaners
– letting agents’ fees
– legal fees for lets of a year or less
– accountant’s fees
– finance payments
– ground rents and service charges
– direct costs such as phone calls, stationery and advertising for new tenants
– replacement beds, carpets, crockery or cutlery, curtains, fridges, washing
machines, sofas etc
– Visits to the property (motor expenses)