How much tax do I pay as a landlord?
If you are a landlord, there are many things you need to consider when it comes to paying tax. Taxes can seem daunting at first, especially if you are new to being a landlord. Your taxes must be completed properly if you want to avoid any fines, large backdated bills, or even criminal prosecution.
There is not one simple answer to how much tax you should be paying as a landlord, as all business circumstances will be different. It is important to educate yourself on taxes and hire a specialist account to ensure you follow the correct guidelines. If you are unsure, it is best that you speak to your accountant or Her Majesty’s Revenue and Customs (HMRC) directly for more advice.
In this article, you will learn the basic tax requirements for landlords and a breakdown of how much you may need to pay.
What taxes do you need to pay?
There are a variety of different taxes you may need to pay as a landlord, including the tax on rental income, national insurance, capital gain tax, and stamp duty tax. The amount you pay will depend on the circumstances of your business, your profit, and the property value.
Rental income tax
Rental income tax is calculated from the profit that you make from your rental property. Your profit equates to the income received, minus any allowable expenses. The amount you will have to pay will also take into consideration your individual circumstances and how much income you gain each month from other sources, to ensure you are in the correct tax bracket. The tax bracket you fall into will be the same as other business and employment rates, for example, 20%, 40%, or 45%.
You are entitled to a £1,000 per year property income allowance when you rent out a property. This means that if the income from your rental property equates to anything up to £1,000 before expenses, you do not need to declare it or pay taxes on it.
If your total income from your rental property is between £2,500 and £9,999 after expenses or more than £10,000 before expenses, you must complete a self-assessment tax return. If your income falls between £1,000 and £2,500, it is advised to contact HMRC for advice.
If your allowable expenses are more than your income, then HMRC considers it a loss and you may not need to pay taxes. If you own more than one property, all your income from each property is collated to determine a profit or loss.
National Insurance
If your rental property profits less than £6,515 per year, a National Insurance payment is voluntary. Voluntarily paying your National Insurance taxes is beneficial to contribute to your entitlement of the full state pension.
If your profits equate to more than £6,515 per year, then you are obligated to pay Class 2 National Insurance tax. This is usually when you are running a business, renting more than one property, or your official, full-time occupation is a landlord.
Capital Gains Tax
If you are selling a rental property, you may need to pay Capital Gains Tax (CGT). This is usually when:
● The property is not your main home
● You used your main home for business
● Profit from the sale is above your tax-free allowance
The amount you pay will depend on your taxpayer status (basic or higher) and whether you claim any relief.
Stamp Duty Land Tax
If you purchase a property to rent, you will have to pay the usual Stamp Duty Land Tax as well as an additional rate of 3%. The amount you pay will depend on the value of the property you purchase, which you can work out using the Government Stamp Duty Calculator.
Deductible expenses
Before paying your rental income tax, it is important to understand what expenses you are allowed to deduct, to ensure you are paying the right amount of tax. Expenses can only be claimed if they are exclusive to the rental property and are considered a reasonable expense. Here are some examples of expenses you are able to deduct:
● Maintenance and repairs
● Insurance
● Letting agent fees
● Accounting fees
● Ground rent
● Legal fees
Expenses you are not allowed to deduct:
● Personal expenses
● Costs incurred from the property you live in
● Home improvement costs
● Mortgage payments
There are also many other expenses you are allowed to deduct, which your accountant can advise you on.
It is important to keep track of the amount and purpose of all your expenses including all receipts, to pass to your accountant as HMRC requires proof of purchase. Your expenses are usually reported on your self-assessment tax return along with your rental income.
When do you pay your taxes?
There are accounting services for landlords that will manage your expenses for you.
You have to claim your rental income and pay tax on the profits you make in each tax year, which run from 6 April to 5 April. Even in circumstances where you’re not paid until the tax year is over, you must still declare rental income for the tax year it’s due. Self-assessment returns are due 31st October for paper filing and 31st January for online filing, following your tax year.
For your first year of being a landlord, you have to register for self-assessment by 5th October to submit a tax return. Here you are provided with your unique reference number and have the option to choose paper or online self-assessment returns.
Most landlords, especially if you intend to build a business or property portfolio, will then engage in accounting services to manage their finances to ensure the taxes are filed and paid correctly.
It is important to familiarise yourself with the taxes that you may be required to pay as a landlord, to avoid any fines or criminal prosecution. If in doubt, always check with your accountant and HMRC to ensure you are paying the correct level of tax within the correct deadlines.