How property rental income is taxed

Property Owners

If you have income from land and property in the UK you need to tell HMRC about it.The only exception is income of less than £4,250 from a lodger in your own home ; this is covered by the rent-a-room allowance.

The normal timescale means that you have until 5 October following the end of the tax year (5 April) in which you first received the income, to tell HMRC.  For example, if you rent out a property you own on 1 March 2014, you need to tell HMRC by 5 October 2014. If you do not do this, you may be charged a penalty.

It is best to tell HMRC as soon as possible after you start, as this will give you more time to consider record keeping, saving up for any tax bill, and how you are going to submit your tax return.

You should inform HMRC of your property income no matter whether you are making a profit or a loss from the property.   But you pay tax only on your net rental profits – that is, your rental income, less the allowable expenses (deductions) of letting.  So if you have no profit, you will have no tax to pay.

HMRC may ask you to complete a tax return, but if the rental profit is low and you are an employee, you may be able to pay tax through PAYE instead – see below.

UK property income is entered on the UK property pages of the self assessment tax return.

On your tax return you enter the income and the expenses. If your rental income is higher than your rental expenses, you are only taxed on this amount, which is your profit. If your rental expenses exceed your income, you have made a loss. If this happens, you should take advice because  this is a complicated area.

If you send in your tax return to HMRC on-line, your tax bill will be calculated automatically. Any profit from property is added to your other income of the tax year. If you are a basic rate taxpayer, you will pay 20% income tax on your rental profits. National Insurance is not paid on rental profits. The tax due is collected under self-assessment – usually a tax bill due by 31 January each year.

Taxing rental income though your PAYE code

There is an alternative to filling in a tax return each year and paying tax under self-assessment. If you are an employee or a pensioner, and your income is taxed under PAYE, you may be able to pay the tax due on the rent through your employment or pension without the need to complete a tax return.

If the rental profit (gross income less allowable expenses) is less than £2,500 a year, and the gross rental income (before deduction of expenses) is less than £10,000 a year, you can ask HMRC to collect any tax due through your PAYE code. You would need to send the tax office a statement of your rental income and expenses each year. HMRC would then change your PAYE tax code to collect the additional tax from your employment or pension.

There is more information about this on the HMRC website at http://www.hmrc.gov.uk/incometax/non-paye-income.htm

TaxAid Tip

Income from property abroad is treated as foreign income on the tax return, but the profit is calculated on a similar basis to property in the UK.

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