With the rise of Airbnb and side hustle culture, as well as trends in UK house prices, property rental is taking a forefront perhaps more than ever before. In today's article, we shed light on the taxation of rental income, and examine Self Assessment for landlords.
If you're wondering about rental income, or want to learn about the tax allowances available for property income, read on for more!
What is Income Tax Self Assessment for landlords?
Depending on your job and income details, there are multiple ways in which you might (or might not) need to file Income Tax. In traditional employment, your employer files Income Tax on your behalf via the PAYE system.
In many other scenarios, however, you might need to declare income and pay tax yourself via the Self Assessment system. One particular scenario could be if you are a landlord, renting out property.
For more info about Self Assessment, check out our succinct overview of Self Assessment. If you already know all about ITSA, why not file your return with our currently free Self Assessment service?
Read on below if you want to learn about Self Assessment rules specifically for landlords.
How to know if you are a landlord?
According to HMRC, it’s pretty simple: you’re a landlord if you rent out your property. In some instances, you can be a landlord even if you don’t own the property you rent out (more info below).
Being a landlord entails certain responsibilities such as maintaining health and safety standards, protecting your tenant's deposit, and checking documentation regarding tenants’ right to rent. The HMRC website provides in-depth details (which can vary depending on your location within the UK).
Note: if you have a roommate who pays half of the bills, this does not necessarily make you a landlord or imply a subletting scenario (since you’re not earning any rental income).
Is being a landlord the same as self-employment (sole trading)?
No. Being a landlord, in the most straightforward sense mentioned above, is regarded more as investment than being self-employed or sole trading. As a result, property income is distinct from trading (e.g. in tax allowances).
However, being a landlord can sometimes be classified as (or coincide with) sole trading. For instance, managing multiple properties or buying and selling property could count as self-employment – especially if it is your main source of income.
Self Assessment for landlords
In theory, rental income counts towards your total personal income. As such, it might need declaring through Self Assessment. Whether or not you need to declare and pay tax on your rental income depends on a number of factors (including property type and tax allowances):
Property allowance
The first £1,000 you earn from rentals is considered tax-free. This is known as your “property allowance”, and no Income Tax will be owed on it. If you have received under £1,000 in rental income in the given tax year, then you will not need to pay tax on it.
If you claim property allowance, you cannot also claim for expenses on your property. If you incur more than £1,000 in expenses, it might be advisory to claim expenses rather than property allowance (which is limited to £1,000).
If your rental income falls between £1,000 and £2,500 in the given tax year, then you need to contact HMRC directly (source).
If your rental income exceeds £2,500 after allowable expenses (or £10,000 before allowable expenses), then you must file Self Assessment and declare this income in time for the relevant deadline.
As a landlord, you could also be eligible for voluntary NIC (National Insurance contributions); consult HMRC for more info.
Rent-a-Room Scheme
The Rent-a-Room Scheme provides tax benefit for people renting out part of their main (or only) home. Technically speaking, if you do this, you are referred to as a “resident landlord”. As a resident landlord, you might be eligible to earn £7,500 in tax free rental income.
Resident landlords providing furnished room(s) or bed-and-breakfast services can choose to claim the Rent-a-Room allowance instead of property allowance for that property. Remember that this only applies if the property is also your main home.
The £7,500 is reduced to £3,750 if you are letting the property jointly (e.g. with a joint owner).
If you are renting out part of your main home as well as another property, it is possible to claim relief through both the Rent-a-Room Scheme (for the former) and property allowance (for the latter).
It’s important to bear in mind that some types of property income could be regarded as trading income. Always seek professional advice if you are unsure.
If you only occasionally rent out part of your home, HMRC provides a service to check whether you need to report this income.
What if you don’t own the property you rent out?
As an employee
If you work in the rental sector as an employee (e.g. as a lettings agent), then your Income Tax is probably calculated and paid through PAYE by your employer. In this scenario, you would not be obliged to pay further Income Tax on this income.
Nonetheless, you still might need to file Self Assessment if you have other income streams; in this instance, you would need to declare any PAYE income via the supplementary form SA102 “Employment” (alongside any self-employment or property income).
Rental income via subletting
If you are renting out part of a property which you yourself are renting, this is known as subletting. As long as you have received permission (usually from your landlord and home insurance provider), this is perfectly reasonable.
When subletting, you may claim allowances such as the Rent-a-Room Scheme. In any case, make sure to declare any and all rental income if it exceeds the relevant allowance/threshold(s).
Digital platform rules
Remember that it is important to keep track of any rental (or other) income you are generating through services such as Airbnb. This is because HMRC has recently introduced stricter rules regarding digital platforms.
If you want to know more about HMRC’s new regulations, and how your personal and financial details are shared between online side hustle services and HMRC, our article on digital platform taxation provides the low-down.
What if you forget to file Self Assessment?
It’s vital to submit your Self Assessment tax return on time (if you need to submit one). Setting discussions of civic duty aside, HMRC can levy fines on late submissions or undeclared income.
If have forgotten to submit ITSA on time, it’s not too late. Luckily, AbraTax supports late submissions reaching back several years. Check this handy guide to use our simple (and currently free) Self Assessment service and file your tax return directly to HMRC.
Do you need to pay VAT on rental income?
No, not usually. Property income received by landlords is generally not regarded as trading income.
However, income derived from property could in some instances be liable for VAT as a type of trade (e.g. if you buy and sell property for profit). To find out more about VAT, read our essential guide to VAT and consider using our low-cost VAT bridging software. More technical info can be found in our guide to bridging software.
TL;DR
- Landlords often need to pay Income Tax on rental income
- You can be a landlord without owning the property
- Allowances (e.g. Rent-a-Room) can reduce tax obligations
- Property income is usually separate from trading income