Rental income is taxed as part of your ordinary income. Your rental profit is the rent you receive minus allowable expenses. It is added to your salary, pension and other income and taxed at your normal rates. For 2026/27 that means 0% up to the £12,570 personal allowance, 20% to £50,270, 40% to £125,140 and 45% above that. Mortgage interest is not deducted. Instead it earns a tax credit worth 20% of the interest. From 6 April 2027, property income moves to its own rates of 22%, 42% and 47% in England and Northern Ireland. The Scottish Parliament and Senedd Cymru can set property rates for their own taxpayers.
How to calculate tax on rental income
The calculation runs in four steps. It is the same whether you let one flat or twenty houses, because all your UK lettings form a single property business.
- Total the rent. Include all rent received for the tax year (6 April to 5 April), plus any other payments for the let such as charges for services you provide;
- Deduct allowable expenses. Revenue costs incurred wholly for the letting. Mortgage interest is left out at this stage;
- Add the profit to your other income. The rental profit sits on top of your employment or pension income, so it is taxed at your highest marginal rate;
- Apply the finance cost credit. Deduct the basic rate value of your mortgage interest and other finance costs from the tax bill.
Most individual landlords work on the cash basis, which counts rent when it is received and costs when they are paid. HMRC's Property Income Manual confirms it has been the default since 2017/18 for individuals with cash receipts of £150,000 or less. You can elect to use accruals accounting instead.
Income tax rates on rental profit for 2026/27
| Band (England, Wales, NI) | Taxable income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The personal allowance falls by £1 for every £2 of adjusted net income above £100,000. Rental profit counts towards that figure. A good year of rents can therefore push a landlord into the band where the effective marginal rate is far higher than 40%. Scottish taxpayers pay Scottish rates on rental profit, just as they do on salary.
What you can deduct
HMRC's guidance lists the usual allowable costs:
- Letting and management. Letting agents' fees, accountants' fees, and legal fees for lets of a year or less;
- Running costs. Buildings and contents insurance, ground rent, service charges, and utilities and council tax where you pay them;
- Maintenance and repairs. Work that restores the property to its previous condition. An improvement is capital and is not deductible against rent, but keep the records because capital costs can reduce a later capital gain;
- Services. Cleaning, gardening and similar services you pay for;
- Replacement furnishings. The cost of replacing a bed, sofa, carpet or appliance in a residential let. The initial cost of furnishing a property is not deductible.
A loss is normally carried forward against future profits of the same rental business. It is not normally set against your salary.
Mortgage interest: the 20% credit
Since 6 April 2020, individual landlords of residential property cannot deduct mortgage interest or other finance costs from rental income. You get a tax reduction instead. It is worth the basic rate value, currently 20%, of the lowest of three amounts:
- Your finance costs for the year, plus any unused amounts brought forward;
- Your property business profits for the year;
- Your adjusted total income above the personal allowance, excluding savings and dividend income.
If the credit is capped by the second or third figure, the excess is carried forward. The credit cannot create a refund. Basic rate taxpayers end up roughly where they would have been with a full deduction. Higher and additional rate taxpayers lose the difference between their marginal rate and 20%. Residential landlords with heavy borrowing are the people who most often weigh up moving properties into a company.
Illustration only. A landlord earns a £60,000 salary and receives £18,000 in rent. Allowable expenses are £3,000 and mortgage interest is £6,000. Rental profit is £15,000, all of it in the higher rate band, so the tax is £6,000. The finance cost credit is 20% of £6,000, which is £1,200. The net tax on the rents is £4,800.
The property income rates from April 2027
Section 7 of Finance Act 2026 sets separate rates for property income. From 2027/28 they are the property basic rate of 22%, the property higher rate of 42% and the property additional rate of 47%. The Budget documents describe them as applying in England, Wales and Northern Ireland. HMRC's technical note adds the following points:
- Finance cost relief will be calculated at the property basic rate of 22%, not 20%;
- Allowances and reliefs will be set against non-property, non-savings, non-dividend income first, so they shelter less of your rental income;
- Scotland and Wales. Section 8 and Schedule 2 of Finance Act 2026 provide for the Scottish Parliament and Senedd Cymru to set property rates for their own taxpayers. They were brought into force for 2027/28 by SI 2026/1023, so Scottish and Welsh landlords should check which rates apply to them;
- Unchanged. The property allowance and Rent a Room scheme stay as they are.
On the same illustration, still a projection, the 2027/28 bill would be 42% of £15,000 (£6,300) less a 22% credit of £1,320, which is £4,980.
Reporting and paying
You must report rental income on a Self Assessment return if it is more than £2,500 after allowable expenses or £10,000 before expenses. If it is between £1,000 and £2,500, contact HMRC. Income of £1,000 or less is covered by the property income allowance. If you are new to Self Assessment, register by 5 October after the end of the tax year. For 2025/26 rents, the paper return was due by 31 October 2026. The online return and the balancing payment are due by 31 January 2027. Landlords with larger bills also make payments on account on 31 January and 31 July.
Making Tax Digital for Income Tax now applies to landlords. It started on 6 April 2026 for those with qualifying income above £50,000. It extends to income above £30,000 from 6 April 2027 and above £20,000 from 6 April 2028. Qualifying income is gross self-employment and property income before expenses, so a landlord with £35,000 of rent and a small profit is still in scope from 2027. See our guide to Making Tax Digital for sole traders for the quarterly cycle. The rules here are taken from HMRC's rental income guidance and the property rates technical note.
The 2027 rate change and quarterly reporting both arrive within the next eighteen months, so now is a good time to check how your lets are held and recorded. Our accountants for landlords prepare property returns and model the 2027/28 position, and our property tax team advises on ownership structure.