Rental income is taxable. That’s not news to most landlords. But the way it’s taxed – and how much you actually end up paying – depends on a web of rules around allowable expenses, mortgage interest restrictions, reporting deadlines, and the interaction between your rental profits and your other income.
The past few years have brought a string of changes that have made life harder for individual landlords. The furnished holiday lettings regime was abolished in April 2025; mortgage interest is restricted to a basic rate tax credit; the annual CGT exemption has been cut to £3,000; and, from April 2027, property income tax rates are rising by 2%.
If you own rental property, understanding how these rules work together is essential for keeping your tax bill under control. Here’s what you need to know.
What Counts as Rental Income?
Rental income is any money you receive from tenants for the use of your property. That includes the monthly rent itself, as well as any additional payments for services like cleaning, utilities, or the use of furniture, if the landlord charges for these separately.
Both residential and commercial property income must be reported to HMRC. The rules below focus on residential property, where most of the complexity lies.
If your total property income is below £1,000 in a tax year, you can use the property income allowance and won’t need to report it. Above that, it all needs to go through Self Assessment.
How Rental Income Is Taxed
Your rental profits are added to your other income for the year and taxed through the income tax system. For 2026/27, the rates for England, Wales, and Northern Ireland are:
- Personal allowance: £12,570 (no tax)
- Basic rate: 20% on income from £12,571 to £50,270
- Higher rate: 40% on income from £50,271 to £125,140
- Additional rate: 45% on income above £125,140
Your rental income doesn’t exist in isolation – it sits on top of any employment income, pension income, or other earnings you have. If your salary already uses up your personal allowance and basic rate band, your rental profits will be taxed at 40% or 45% from the first pound.
Property Income Tax Rates from April 2027
From the 2027/28 tax year, a new set of rates will apply specifically to property income. These are two percentage points higher than the standard income tax rates: 22% for the basic rate, 42% for the higher rate, and 47% for the additional rate.
This only affects individual landlords. Rental profits held within a limited company will continue to be subject to corporation tax at the standard rates (19% or 25%).
Allowable Expenses
You’re taxed on your rental profit, not your rental income. That means every legitimate expense you can deduct reduces your tax bill.
Allowable expenses must be incurred “wholly and exclusively” for the purpose of the rental business. The main categories include:
- Letting agent and property management fees
- Buildings and contents insurance
- Repairs and maintenance (but not improvements – more on this below)
- Council tax, water rates, and utilities if paid by the landlord
- Ground rent and service charges
- Accountancy and legal fees related to the property
- Advertising for tenants
- Cost of replacing domestic items (furniture, appliances, kitchenware) on a like-for-like basis
Repairs vs Improvements
HMRC draws a firm line between repairs and improvements. Replacing a broken boiler with a similar model is a repair – it’s deductible. Upgrading to a higher-spec system is an improvement – it’s not deductible as a revenue expense (though it can reduce your CGT bill when you sell the property).
Broadly, if you’re restoring something to its previous condition, it’s a repair. If you’re making it better than it was, it’s an improvement.
Replacement of Domestic Items Relief
For furnished rental properties, the old 10% wear-and-tear allowance was scrapped in 2016.
In its place, you can deduct the cost of replacing domestic items – sofas, beds, carpets, curtains, white goods – but only when you actually replace them, and only on a like-for-like basis. If you upgrade, you can only deduct the cost of a like-for-like replacement.
Mortgage Interest: The Restriction That Changed Everything
This is the single biggest tax change for individual landlords in recent memory, and it’s been fully in effect since April 2020.
Individual landlords can no longer deduct mortgage interest as a rental expense. Instead, you receive a tax credit equal to 20% of your mortgage interest payments. This is calculated after your taxable income has been worked out – so the interest doesn’t reduce your taxable profit; it only reduces the tax you pay on it.
For basic rate taxpayers, the practical effect is broadly neutral. But for higher and additional rate taxpayers, the difference is substantial. Our article on how to claim mortgage interest tax relief on rental properties works through the numbers in detail.
There’s also a secondary effect that catches people out. Because your mortgage interest no longer reduces your taxable income, it can push your total income above key thresholds – such as the £100,000 personal allowance taper or the £60,000 High Income Child Benefit Charge threshold – even though you haven’t actually received more cash.
The Rent a Room Scheme
If you rent out a furnished room in your own home (the home you live in), you can earn up to £7,500 per year tax-free under the Rent a Room scheme. This applies to a spare bedroom, a converted loft, or any furnished accommodation within your main residence.
If your rental income from the room is below £7,500, you don’t need to report it to HMRC. If it exceeds £7,500, you can choose to either pay tax on the amount above £7,500 (with no expense deductions) or opt out of the scheme and report actual income and expenses instead.
The scheme doesn’t apply to properties you don’t live in. It’s strictly for rooms within your own home.
Furnished Holiday Lettings: What’s Changed
If you previously ran a furnished holiday let, the tax rules have changed substantially.
The furnished holiday lettings (FHL) regime was abolished from 6 April 2025. Properties that were previously classified as FHLs are now treated the same as any other residential rental property. This means:
- Mortgage interest is now restricted to a 20% tax credit (FHL owners previously deducted it in full)
- Capital allowances are no longer available on new expenditure (though existing unrelieved pools can continue to be claimed)
- Business Asset Disposal Relief, rollover relief, and gift relief are no longer available on disposal
- Profits can no longer count as “relevant earnings” for pension contribution purposes
- For jointly owned properties held by married couples, the default 50:50 income split now applies unless a Form 17 declaration has been made
If you still own a former FHL property, the way it’s taxed has fundamentally changed. It’s worth reviewing your position with an accountant if you haven’t already.
Reporting Rental Income
Rental income is reported through Self Assessment. You’ll need to file a tax return if your property income exceeds the £1,000 property income allowance.
The property income pages of the Self Assessment return ask for your total rents received, allowable expenses broken down by category, and the resulting profit or loss. If you own multiple properties, they all form part of a single UK property business – you don’t file separately for each one.
Making Tax Digital
From April 2026, landlords with qualifying income over £50,000 (gross property and self-employment income combined) must comply with Making Tax Digital for Income Tax. This means keeping digital records using compatible software and submitting quarterly updates to HMRC.
The threshold drops to £30,000 from April 2027 and £20,000 from April 2028.
If you’re a landlord who currently does everything once a year at Self Assessment time, this is a major change to your reporting routine.
Capital Gains Tax When You Sell
When you sell a rental property, you’ll likely face a CGT bill on the gain. The rates for residential property disposals are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.
The annual exempt amount is just £3,000 – providing very little shelter on a property gain.
You must report the disposal and pay the CGT within 60 days of completion through HMRC’s online service. This is separate from your Self Assessment return, though the disposal must be included on your return too.
For a fuller breakdown of how CGT works on second homes, including reliefs, deductions, and strategies to reduce the bill, see our article on capital gains tax on selling a second home.
How Double Point Can Help
The tax rules for landlords have become more complex and more expensive in recent years. Between the mortgage interest restriction, the FHL abolition, rising property income tax rates, and the arrival of Making Tax Digital, there’s a lot to keep on top of.
At Double Point, we work with landlords at every stage – from filing your annual Self Assessment and making sure all allowable expenses are claimed, to advising on whether a limited company structure might be more tax-efficient for your portfolio. We also handle the 60-day CGT reporting when you sell, and we can help you get set up for MTD if you’re within scope.
If you’re not sure whether your rental income is being managed as tax-efficiently as it could be, let’s have a conversation.
Book a free consultation with us today.