How Much Tax on UK Rental Income? (2026/27)

UK rental income is taxed at your marginal income tax rate (20%, 40% or 45%) on the net profit after allowable expenses. The £1,000 property allowance covers small rental income (below £1,000 gross). Critically, since 2020 mortgage interest is not directly deductible — instead landlords get a 20% basic-rate tax credit on mortgage interest, regardless of their tax band. This restructuring (Section 24 of the Finance Act 2015, fully effective from 2020) significantly increased the effective tax rate for higher-rate landlords with mortgaged properties.

This is how rental income tax actually works for UK landlords in 2026/27.

The basic calculation

For a single rental property:

Taxable rental profit = Gross rental income − Allowable expenses

Allowable expenses include:

• Letting agent fees.
• Maintenance and repairs (not improvements — those are capital).
• Property insurance.
• Ground rent and service charges.
• Council tax (if you pay it during voids).
• Utility bills (if you pay them, e.g. for an HMO).
• Accountancy fees.
• Travel expenses to and from the property for management purposes.
• Wear and tear / replacement of furnishings (since 2016 a separate “Replacement Domestic Items” relief).

What you can’t deduct as expenses:

• Capital costs (major improvements that increase property value).
• Mortgage interest (since 2020 — see below).
• Personal living costs.

The taxable profit is then added to your other income for the year and taxed at your marginal rate.

The mortgage interest change (Section 24)

This is the most important rule for mortgaged landlords:

• Before 2017: mortgage interest was fully deductible as an expense.
• 2017–2020: phased restriction.
• From 2020/21 onward: mortgage interest is NOT deductible.

Instead, landlords get a 20% basic-rate tax credit on mortgage interest:

• The credit reduces your final tax bill by 20% of the interest paid.
• Available to all landlords regardless of their tax band.

For basic-rate (20%) landlords: this is roughly equivalent to the old deduction.

For higher-rate (40%) and additional-rate (45%) landlords: this is a significant tax increase compared to the old system.

A worked example for a higher-rate landlord:

• Rental income: £15,000.
• Other expenses: £3,000.
• Mortgage interest: £5,000.
• Other income: £55,000 (already in higher-rate band).

Old calculation (pre-2017):

• Taxable profit: £15,000 − £3,000 − £5,000 = £7,000.
• Tax at 40%: £2,800.

New calculation (2020 onward):

• Taxable profit: £15,000 − £3,000 = £12,000.
• Tax at 40%: £4,800.
• Less mortgage interest credit (20% × £5,000): £1,000.
• Net tax: £3,800.

Difference: £1,000 more tax under the new system for this scenario.

The change has pushed many highly-leveraged landlords into uneconomic territory or into limited company structures (where Section 24 doesn’t apply).

The £1,000 property allowance

For casual property letting:

• Gross rental income at or below £1,000 per tax year: covered by the property allowance, no tax to pay.
• Above £1,000: must declare on Self Assessment.

The property allowance works similarly to the trading allowance:

• Option A: Claim actual expenses.
• Option B: Claim the £1,000 allowance.
• Choose the higher deduction.

The property allowance is separate from the trading allowance — you can use both if you have both types of income.

Rent a Room scheme

If you let a furnished room in your own home:

• The Rent a Room scheme allows up to £7,500 per year tax-free (or £3,750 if shared with another).
• No registration needed below the threshold.
• Above £7,500, you can choose between claiming actual expenses or paying tax on the excess over £7,500.

This applies only to your main home, not to a rental property you let out entirely.

HMRC Rent a Room scheme.

Replacement Domestic Items relief

Since 2016, you can claim relief when replacing furnishings in a furnished rental property:

• Beds, sofas, white goods (fridge, washing machine), carpets, curtains.
• You claim the cost of the replacement (not the original purchase).
• The new item must be a like-for-like replacement (or a reasonable equivalent).

You can’t claim improvements (e.g. upgrading a fridge to a more expensive model — only the equivalent value is claimable).

Capital Gains Tax on selling a rental property

When you sell a rental property:

• CGT applies on the gain (difference between sale proceeds and purchase price, less costs).
• Annual exemption: £3,000 (2026/27).
• Rates (from 30 October 2024): 18% basic-rate band, 24% higher-rate band — same as other assets.
• Reporting deadline: 60 days from completion (much faster than other CGT reporting).

You report via the Capital Gains Tax UK property service.

Limited company route — when it helps

Some landlords hold properties through a limited company instead of personally:

Pros:

• Mortgage interest fully deductible as a business expense (Section 24 doesn’t apply).
• Corporation tax on profit (currently 19–25%, depending on profit level) instead of personal marginal rate.
• More favorable for landlords in higher tax bands holding mortgaged properties.

Cons:

• Mortgage rates higher for corporate landlords (typically 0.3–0.7% more than personal).
• Extracting profit from the company creates additional tax (dividend tax or salary).
• Additional accountancy and admin costs — typically £500–£2,000/year more.
• Limited company purchases attract higher SDLT (the additional dwelling supplement, plus a flat 15% for company purchases above certain thresholds).

For a single landlord with one property, sticking with personal ownership usually wins. For a portfolio landlord with multiple highly-mortgaged properties, the company route often wins.

The break-even depends on profit level, tax band, and mortgage leverage.

Worked example: typical mortgaged buy-to-let

Imran owns a buy-to-let property:

• Annual rental income: £12,000 (£1,000/month).
• Mortgage interest: £4,800 (annual).
• Letting agent fees: £1,200 (10%).
• Maintenance: £600.
• Insurance: £300.
• Other expenses: £200.
• Other income: £55,000 (PAYE, higher rate).

Tax calculation:

• Allowable expenses (excluding mortgage interest): £1,200 + £600 + £300 + £200 = £2,300.
• Taxable rental profit: £12,000 − £2,300 = £9,700.
• Tax at 40% (higher rate): £3,880.
• Mortgage interest credit: £4,800 × 20% = £960.
• Net tax on rental: £2,920.

Cash flow:

• Gross rent: £12,000.
• Less expenses + mortgage interest: £2,300 + £4,800 = £7,100.
• Net cash flow: £12,000 − £7,100 = £4,900.
• Less tax: £2,920.
• Net cash after tax: £1,980.

Imran’s effective tax rate on the cash flow: £2,920 / £4,900 = ~60% — substantially higher than his marginal income tax rate because of Section 24’s impact on mortgage interest.

Furnished holiday lettings — special rules

Properties that qualify as Furnished Holiday Lettings (FHL) historically had favorable tax treatment:

• Mortgage interest fully deductible.
• Capital allowances on furniture and fittings.
• Capital Gains Tax reliefs.
• Pension contribution allowances based on FHL income.

From April 2025, the FHL regime was abolished. FHL properties are now taxed like other rental property:

• No special mortgage interest treatment.
• No FHL-specific reliefs.
• CGT and pension treatments aligned with general rental.

This is a major shift affecting holiday let landlords. Check current guidance for transitional rules.

Internal links

• How do I file a self assessment tax return for the first time?
• What is the personal allowance and how does it work?
• What expenses can I claim as self employed UK?

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This guide is information, not regulated financial advice. UK rental property taxation has changed significantly since 2020 — speak to a qualified UK tax adviser before relying on a specific position.