Landlord Tax Guide: Rental Income, Allowable Expenses, and Self-Assessment

TL;DR

You pay Income Tax on your rental profit: rent received minus allowable expenses. Mortgage interest is not an expense — instead you get a tax credit worth 20% of it (22% from April 2027). In 2026/27 the profit is taxed at your normal rates of 20%, 40% or 45%; from 6 April 2027 property income gets its own rates of 22%, 42% and 47% (GOV.UK). You report it on a Self Assessment return, filed online by 31 January — and if your gross property and self-employment income is over £50,000, you should already be using Making Tax Digital.

How Rental Income Is Taxed

Rental income is property income. Your rental profit is added to your other income (salary, pension, and so on) and taxed at whichever band it falls into.

Rates and Bands (England)

Sources: GOV.UK Income Tax rates; the separate property rates are set by sections 6 and 7 of the Finance Act 2026. Your Personal Allowance falls by £1 for every £2 of adjusted net income over £100,000, so rental profit that takes you over £100,000 costs more than the headline rate suggests. Scotland sets its own Income Tax rates, and the Finance Act 2026 lets the Scottish Parliament and the Senedd set their own property rates.

The £1,000 Property Allowance

If your gross property income is £1,000 or less in a tax year, you do not need to tell HMRC about it. Above that, you must declare it. You can choose to deduct the £1,000 allowance instead of your actual expenses, but you cannot claim both, and you cannot use the allowance at all if you claim the tax credit for mortgage interest (GOV.UK: tax-free allowances on property and trading income). For most mortgaged landlords, actual expenses plus the credit will be worth more.

Allowable Expenses

Expenses must be incurred wholly and exclusively for the letting (HMRC Property Income Manual, PIM2000). HMRC's list of allowable expenses includes:

• Letting agent and management fees
• Landlord insurance for buildings, contents and public liability
• Council tax, water rates and utilities, where you pay them
• General maintenance and repairs (not improvements — see below)
• Legal fees for lets of a year or less, and accountancy fees
• Ground rent and service charges
• Services you pay for, such as cleaning or gardening, and advertising for new tenants
• The rental share of vehicle running costs

Capital expenses — buying the property, extensions, improvements — are not allowable against rental income, though they may reduce Capital Gains Tax when you sell.

Repairs vs Improvements

A repair restores something to its original condition. Replacing a part with the nearest modern equivalent is still a repair where the improvement is only incidental — HMRC's example is replacing imperial pipes or tanks with the closest metric equivalent.

The common mistake is to assume you can deduct the "like-for-like" portion of an upgrade and treat the rest as capital. HMRC's position is the opposite: "Where a significant improvement arises from the change of materials, the whole of the cost is capital expenditure" (PIM2030). If the work is a genuine improvement, none of it is deductible as a repair.

Replacement of Domestic Items Relief

For residential lets you can deduct the cost of replacing movable furniture, furnishings, household appliances and kitchenware — beds, sofas, white goods, carpets, curtains, crockery. The deduction is the cost of the new item (on a like-for-like basis) plus disposal costs, minus anything you received for the old one. It does not cover the first furnishing of a property, or fixtures that are part of the building, which fall under the repairs rules (GOV.UK).

Mortgage Interest: The Tax Credit (Section 24)

Since 6 April 2020, relief for residential finance costs — mortgage interest, interest on loans to buy furnishings, and arrangement fees — has been given only as a tax credit at the basic rate of 20% (GOV.UK). From 2027/28 the credit rises to the property basic rate of 22%.

1. Work out your rental profit without deducting finance costs.
2. Pay tax on that profit at your marginal rate.
3. Take off the tax credit. It is 20% (22% from 2027/28) of the lowest of: your finance costs (plus any brought forward), your property profits, and your adjusted total income above the Personal Allowance. Unused finance costs carry forward.

For a basic-rate taxpayer whose profit stays inside the basic-rate band, the result is the same as a deduction. For a higher-rate taxpayer it is not: the profit is taxed at 40% but the interest is relieved at 20%. And because the profit is calculated before interest, it can push a basic-rate taxpayer into the higher-rate band even when the cash left over is small.

Worked Example: A Higher-Rate Landlord, 2026/27 vs 2027/28

A landlord earns a £60,000 salary (so every pound of rental profit is taxed at the higher rate), lets one flat for £1,200 a month, pays £2,400 a year in allowable expenses and £7,200 in mortgage interest.

The credit here is based on the full £7,200 because that is the lowest of the three figures in step 3. Rates from GOV.UK Income Tax rates and the April 2027 property rates announcement. A basic-rate landlord with the same flat and enough headroom in the basic-rate band would pay £2,400 − £1,440 = £960 in 2026/27.

Capital Gains Tax When You Sell

Gains on residential property are taxed at 18% within your unused basic-rate band and 24% above it, after the annual exempt amount of £3,000 for 2026/27 (GOV.UK: CGT rates). You must report and pay any CGT due on UK residential property within 60 days of completion, separately from your Self Assessment return (GOV.UK).

Self Assessment and Making Tax Digital

If your property income is over £1,000, register for Self Assessment and file a return each year.

Deadlines

• 5 October after the end of the tax year: tell HMRC you need to file, if you are new to Self Assessment
• 31 October: paper returns
• 31 January: online returns, and payment of the balance of tax due
• 31 July: second payment on account, if you make them

Source: GOV.UK Self Assessment deadlines.

Making Tax Digital for Income Tax

MTD for Income Tax requires you to keep digital records and send HMRC quarterly updates through compatible software. Whether it applies depends on your qualifying income — your total gross self-employment and property income before expenses, taken from an earlier tax return (GOV.UK):

Source: GOV.UK: check if you need to use Making Tax Digital for Income Tax. Because the test is gross income, a landlord collecting £2,600 a month (£31,200 a year) in 2025/26 is in scope from April 2027 even if the letting makes little profit.

Further Reading

• Rent increases under the Renters' Rights Act — how rent can be raised, which feeds straight into taxable income.
• Energy efficiency improvements for rental property — works that may be capital rather than repairs.
• Managing a rental property without a letting agent — if you self-manage, the record-keeping is yours.