Paying tax and National Insurance

When you rent out property you may have to pay tax.

Running a property business

You have to pay Class 2 National Insurance if your profits are more than £12,570 a year and what you do counts as running a business, for example if all the following apply:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

If your profits are under £6,725, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business - even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

Property you personally own

The first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’.

Contact HM Revenue and Customs (HMRC) if your income from property rental is between £1,000 and £2,500 a year.

You must report it on a Self Assessment tax return if it’s:

  • £2,500 to £9,999 after allowable expenses
  • £10,000 or more before allowable expenses

Register for Self Assessment

If you do not usually send a tax return, you need to register by 5 October following the tax year you had rental income.

Register now

Declaring unpaid tax

You can declare unpaid tax by telling HMRC about rental income from previous years. If you have to pay a penalty it’ll be lower than if HMRC find out about the income themselves.

You’ll be given a disclosure reference number. You then have 3 months to work out what you owe and pay it.

Do not include the £1,000 tax-free property allowance for any tax years before 2017 to 2018.

Property owned by a company

Count the rental income the same way as any other business income.

Costs you can claim to reduce tax

There are different tax rules for:

  • residential properties
  • furnished holiday lettings
  • commercial properties

Residential properties

You or your company must pay tax on the profit you make from renting out the property, after deductions for ‘allowable expenses’.

Allowable expenses are things you need to spend money on in the day-to-day running of the property, like:

  • letting agents’ fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountants’ fees
  • buildings and contents insurance
  • maintenance and repairs to the property (but not improvements)
  • utility bills, like gas, water and electricity
  • rent, ground rent, service charges
  • Council Tax
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery and advertising

If you’re a company paying Corporation Tax, you can claim interest on property loans as an allowable expense. You cannot do this if you’re an individual landlord who pays Income Tax. Read more about changes to tax relief for residential property.

Allowable expenses do not include ‘capital expenditure’ - like buying a property or renovating it beyond repairs for wear and tear.

You may be able to claim tax relief on money spent on replacing a ‘domestic item’. This is called ‘replacement of domestic items relief’.

Domestic items include:

  • beds
  • sofas
  • curtains
  • carpets
  • fridges
  • crockery and cutlery

You must have only bought the domestic item for use by tenants in a residential property and the item you replaced must no longer be used in that property.

The replacement of domestic items relief is available from:

  • the 2016 to 2017 tax year for individuals and partnerships
  • 1 April 2016 for companies

Furnished residential lettings

You may be able to claim ‘wear and tear allowance’:

  • for the 2015 to 2016 tax year for individuals and partnerships
  • on or before 31 March 2016 for companies

Furnished holiday lettings

For furnished holiday homes, you may be able to claim:

  • plant and machinery capital allowances on furniture, furnishings and so on in the let property, as well as on equipment used outside the property (like vans and tools)
  • Capital Gains Tax reliefs - Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders

You can only claim these if all the following apply:

  • the property is offered to let as furnished holiday accommodation for at least 210 days a year
  • it’s let to the public as furnished holiday accommodation for at least 105 days a year
  • long lets (31 or more days in a row) must not total more than 155 days in a year
  • you charge the going rate for similar properties in the area (‘market value’)

Your profits count as earnings for pension purposes.

To help with your tax return, you can use the capital allowances helpsheet and the furnished holiday lettings helpsheet.

Commercial properties

You can claim plant and machinery capital allowances on some items if you rent out a commercial property - like a shop, garage or lock-up.

Working out your profit

You work out the net profit or loss for all your property lettings (except furnished holiday lettings) as if it’s a single business. To do this, you:

  • add together all your rental income
  • add together all your allowable expenses
  • take the expenses away from the income

Work out the profit or loss from furnished holiday lettings separately from any other rental business to make sure you only claim these tax advantages for eligible properties.

Making a loss

Deduct any losses from your profit and enter the figure on your Self Assessment form.

You can offset your loss against:

  • future profits by carrying it forward to a later year
  • profits from other properties (if you have them)

You can only offset losses against future profits in the same business.