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How Much Tax Do I Pay On Rental Income?


After new legislation came into effect in April 2017, private landlords are set to see big changes to their level of taxation on buy-to-let investment properties over the next three years. So how does it work and, more importantly, if you’re a landlord, how much tax will you pay on your rental income?


Being a private landlord works in much the same way as running your own business. And, just like any other business, you need to pay tax on your profits - in this case, your rental income. Up until April this year, you’ll have been able to claim full tax relief on your mortgage payments based on your overall tax band.


But by 2020, the mortgage tax relief will be downsized to a standard basic of just 20% for every landlord. If you’re a high-rate (40% or 45%) taxpayer, it means you’ll be paying more tax because of your rental income. If you’re in the basic 20% tax rate at the moment, then your position remains unchanged. But, based on your rental income, you could be forced up into a higher bracket.


So How Much Tax Do You Pay?

A yearly rental income of £10,000 with £9,000 in mortgage interest payments, means a pre-tax profit of £1,000. Therefore, before April this year, you’d pay tax of £200 (20% rate), £400 (40% rate) or £450 (45% rate) on that profit depending on your tax band.


By 2020 you’ll be paying tax on the full amount of rental income earned, with relief on just the first 20%. Therefore, if you’re a higher rate taxpayer, the amount of tax you pay on your rental income would be £4,000 (40% rate of the £10,000 income), less £1,800 (20% tax relief on the £9,000 interest) which works out as a sum of £2,200.


So from a £400 payment, it will increase to become a £2,200 payment for a landlord in the 40% tax bracket - an increase of £1,800. If you’re currently sitting in the 45% tax band, then you can expect an even larger increase.


What Can You Do About It?

It’s important that every landlord knows about these tax changes. And let’s not forget that they’re in effect right now, so you need to have a plan to ride the tax hike without making losses on your property rental income. Fortunately, there are a number of options available to you.


The most obvious answer to combat how much tax you pay is to raise your rent. Not ideal, as it may alienate many of your existing tenants who would see an immediate increase in their own outgoings. Inflated rents could also put off any prospective new tenants who may find themselves unable or unwilling to justify the cost.


If that option is ringing alarm bells, then you could also explore the advantages of a lower mortgage or trying to reduce the mortgage amount with your provider. There is of course, the option to sell up, but much would depend on the current market and your dependance on the additional income.


It’s worth mentioning that limited companies are not affected by these new tax changes. In an effort to reduce the tax they pay on rental income, many landlords are setting up limited companies that effectively own their properties. This means you’d be taxed at Corporation Tax rates, which should be more agreeable than the rise in income tax, but also means you risk a hefty Capital Gains tax bill.


To reduce your tax obligations even further, there’s a substantial list of allowable costs that you could, and should, be claiming for, making your tax bill more manageable overall. Previously, landlords had a ‘golden ticket’ that allowed them to claim 10% tax relief for ‘wear and tear’ on their property and its contents - even if no spending had taken place.


While this is no longer in effect, legitimate costs and expenses include any legal, financial or letting agent fees, utilities, service charges, and many more, as well as any expenses claimed with letting your property such as advertising.



However, anything you’re claiming for on your rental property - from essential furniture to window cleaning - must now be accounted for with receipts and/or invoices.


Your Next Steps


While the changes to tax can be confusing and possibly alarming, they’re happening. And it would be prudent to get advice on how much tax you’ll pay on your rental income at this early stage while the changes are still being phased in.



As specialist property sales and letting agents, the experienced team at Silverman Black can offer you any help and advice you need. Give our experts a call today on 0208 773 2929 and we’ll answer any questions you have and help you make the right decision for you and your property. 

30/08/17 By Simon Walsh
Category: News
Tags: Letting Advice
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