You cannot lawfully avoid all tax on rental income, but you can make sure you pay no more than the law requires. The main legitimate routes are the £1,000 property allowance, the £7,500 Rent a Room Scheme for a lodger in your own home, claiming every allowable expense, using the 20% tax credit on mortgage interest correctly, and splitting income with a spouse or civil partner who pays tax at a lower rate. For 2026/27, rental profit is taxed with your other income at 20%, 40% or 45% once your £12,570 personal allowance is used. Hiding rent from HMRC is evasion, not planning.
Start with the tax-free allowances
Two allowances take small amounts of rent out of tax:
- Property allowance. Up to £1,000 a year of gross property income is tax-free. If your gross rent is £1,000 or less you do not need to tell HMRC. Above that, you can deduct £1,000 instead of actual expenses, but not if you also claim the tax reduction for mortgage interest on a residential let. It cannot be used on income from a company or partnership you or someone connected to you controls, or from your employer;
- Rent a Room Scheme. Letting furnished accommodation in your own home lets you earn up to £7,500 a year tax-free, or £3,750 each if you share the income with someone else. The exemption is automatic below the threshold. Above it you complete a tax return and choose either to deduct the £7,500 or to report actual income and expenses.
The property allowance cannot be combined with Rent a Room on the same income. For a lodger the Rent a Room threshold is almost always the better choice.
Claim every allowable expense
Tax is paid on profit, not rent. You can deduct costs incurred wholly and exclusively for the letting, including:
- Repairs and maintenance. Work that restores the property to its original condition, such as replacing storm-damaged roof tiles. Like-for-like replacement of fixtures such as baths, washbasins or toilets also counts as a repair;
- Replacement of domestic items. The cost of replacing furniture, furnishings and appliances in a residential let. The initial cost of buying them is not deductible, but replacements are;
- Running costs. Letting agent and management fees, accountant's fees, landlord insurance, ground rents and service charges, and water rates, council tax, gas and electricity if you pay them;
- Part-business costs. Where only part of a cost relates to the letting, you deduct that part.
Improvements are capital, not repairs. An extension, or a security system where there was not one before, is not deductible against rent, although it may reduce capital gains tax when you sell.
Losses are not wasted. If your expenses exceed your rent, the loss is normally carried forward and set against future profits from the same property business. All your UK lets count as one business, so a loss on one property automatically reduces the profit on another. Overseas lets are kept separate.
Get the mortgage interest relief right
Individual landlords of residential property cannot deduct mortgage interest from rental profit. Instead they get a tax reduction worth the basic rate, 20%, of their finance costs. The reduction is limited to 20% of the lowest of finance costs, property profits or adjusted total income. Any interest that cannot be relieved in one year is carried forward. From 2027/28 Finance Act 2026 raises this credit to the new property basic rate of 22%.
Interest on extra borrowing can qualify if the money is used wholly for the letting, but not on borrowing above the property's value when it entered the letting business.
Split the income with your spouse or civil partner
If you are married or in a civil partnership, live together and own a property jointly, HMRC taxes you on the rental income in equal shares by default. If your actual beneficial ownership is unequal, you can file Form 17 to be taxed on your real shares instead. The notice must reach HMRC within 60 days of the date of the declaration, and it applies only to income arising from that date.
Worked example. Amira earns £60,000 and her husband Tom earns £10,000. They own a mortgage-free flat with a rental profit of £12,000.
| Split | Amira's tax | Tom's tax | Total |
|---|---|---|---|
| 50:50 (default) | £6,000 × 40% = £2,400 | £2,570 tax-free, £3,430 × 20% = £686 | £3,086 |
| 10:90 (Form 17) | £1,200 × 40% = £480 | £2,570 tax-free, £8,230 × 20% = £1,646 | £2,126 |
The saving is £960 a year. It only works if Tom really owns 90% of the flat. The Form 17 declaration must reflect actual beneficial ownership, so Tom would also own 90% of the capital value. Transferring an interest in a mortgaged property can also have stamp duty and lender consequences, so take advice before changing the ownership.
Watch the income cliff edges
Rental profit is added to your other income. Your personal allowance falls by £1 for every £2 of adjusted net income above £100,000, and disappears at £125,140. Within that band the effective marginal rate is 60%.
Adjusted net income is reduced by personal pension contributions and Gift Aid donations, using the grossed-up amount. A pension contribution can bring income back below £100,000, restoring the allowance and earning pension relief.
Should you use a limited company?
A company pays corporation tax rather than income tax. The rate is 19% on profits of £50,000 or less and 25% on profits above £250,000, with marginal relief between those limits. A company can deduct mortgage interest in full. Against that, taking money out as salary or dividends is taxed again, and moving properties you already own into a company is treated as a disposal at market value, because you and the company are connected. That can trigger capital gains tax, and stamp duty land tax is charged on at least the market value. See our guide to incorporation relief for property.
Finance Act 2026 introduces separate property rates of income tax from 2027/28: 22% basic, 42% higher and 47% additional rate. The Act also gives the Scottish Parliament and Senedd Cymru power to set property rates for their own taxpayers, from a tax year the Treasury will appoint by regulations.
What is not allowed
Not declaring rent, claiming improvements as repairs or inflating expenses is evasion. HMRC's Let Property Campaign lets landlords who owe tax on residential lettings get up to date, and HMRC says a complete and unprompted disclosure generally points to a civil rather than a criminal investigation. Our guide to voluntary disclosure to HMRC explains the process.
Sources: HMRC guidance on working out rental income, the property allowance, the Rent a Room Scheme, finance cost relief and Form 17; section 837 of the Income Tax Act 2007; and section 7 of the Finance Act 2026. For the full calculation, see our guide to tax on rental income.
If you would like your expenses, ownership split or company question checked against your own figures, our accountants for landlords prepare property returns, and our property tax team advises on structure.