How the UK Tax Allowance Works for Rental Income

Rental income is taxable in the UK. Whether you let a spare room, own multiple buy-to-let properties, or rent out a commercial unit, you must declare this income to HMRC. However, you can deduct a range of allowable expenses to reduce your taxable profit.

The Property Allowance

If your total rental income is £1,000 or less in the tax year, it is fully covered by the Property Allowance and you do not need to declare it or pay tax. If it is between £1,000 and slightly higher amounts, you can choose to deduct £1,000 as a flat allowance instead of calculating individual expenses — useful for small or occasional lets with minimal costs.

Allowable Expenses for Landlords

You can deduct the following from your rental income: letting agent fees and management charges; legal fees for new tenancy agreements under one year, and for renewing a lease; accountancy fees for preparing rental accounts; buildings and contents insurance; maintenance and repairs (not improvements); council tax and utility bills (if paid by you and not recharged to tenants); ground rent and service charges for leasehold properties; advertising costs; the cost of providing services such as cleaning communal areas.

Mortgage Interest: Section 24

The Section 24 restriction (phased in from April 2017, fully in force from April 2020) means residential landlords can no longer deduct mortgage interest as an expense. Instead, they receive a 20% tax credit on finance costs. This change primarily hurts higher rate taxpayers: a landlord paying 40% tax who previously deducted £10,000 of interest (saving £4,000 in tax) now only gets a £2,000 credit. The change does not apply to commercial property or furnished holiday lettings.

Capital vs Revenue Expenditure

Only repairs and maintenance are deductible revenue expenses — not improvements. Replacing a like-for-like kitchen is a repair; upgrading to a significantly better kitchen is an improvement and must go through capital allowances instead. The distinction matters and HMRC challenges claims where improvements are dressed as repairs.

The Rent-a-Room Scheme

If you let a furnished room in your own home (not a buy-to-let), you can receive up to £7,500 of rent tax-free under the Rent-a-Room Scheme. If income exceeds £7,500, you either pay tax on the full amount above £7,500 or opt out of the scheme and declare all income minus all expenses — whichever is more beneficial.

Reporting Rental Income

Rental income above £1,000 must be declared on your Self-Assessment tax return. Even if you are an employee with all your employment income taxed through PAYE, you must file a Self-Assessment return to declare rental income. Keep records of all income received and all expenses paid, including dated receipts and bank statements.

Making Tax Digital

From April 2026, landlords with rental income above £50,000 (combined with self-employment income if applicable) will be required to use MTD-compatible software and submit quarterly updates to HMRC. The threshold drops to £30,000 from April 2027. Start using digital records now to be prepared.