Property Income tax can be paid in two ways, by paying a bill generated by HMRC following completion of a Self Assessment or payment through a person’s PAYE tax code.
By entering the gross rental income and expenses on to their tax return, landlords’ profit or loss is then calculated.
If the gross rental income is higher than rental expenses, landlords are taxed on the difference which is the rental profit.
If rental expenses exceed the landlord’s gross rental income, they have made a loss. If a landlord has made a loss they may want to take advice from a tax adviser or contact HMRC as it can be a complicated area.
If a landlord sends in their Self Assessment tax return to HMRC online, the tax bill will be calculated automatically.
Any profit from property is added to the landlord’s other income from the tax year.
If the landlord is a basic rate taxpayer, they will pay 20% Income Tax on their 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 through a PAYE code
There is an alternative to filling in a tax return each year and paying tax under Self Assessment.
If a landlord is an employee or a pensioner and their income is taxed under PAYE, they may be able to pay the tax due on the rent through their employment or pension tax without the need to complete a tax return.
If the rental profit (rental income less allowable expenses) is less than £2,500 a year, and the rental income (before deduction expenses) is less then £10,000 a year, landlords can ask HMRC to collect any tax due through your PAYE code.
They would need to send the tax office a statement of their rental income and expenses each year.
HMRC would then change their PAYE tax code to collect the additional tax from the landlord’s employment or pension.
If they have income from property abroad it is treated as foreign income on the tax return, but the profit is calculated on a similar basis to property in the UK.
Landlord’s UK property income must be worked out separately from any foreign property income they may have.