If you rent out a property in the UK, the profit you make is subject to income tax. The rules changed significantly with the introduction of Section 24 — the restriction on mortgage interest relief — which increased the tax bill for many landlords, particularly higher-rate taxpayers.
How Rental Income Is Taxed
Rental income is added to your other income (salary, pensions, dividends) and taxed at your marginal rate. You receive the same Personal Allowance (£12,570) and the same tax bands apply: 20%, 40%, or 45% for England/Wales/NI (Scotland has its own rates).
Example: You earn £40,000 from employment and £10,000 in net rental profit. Your total income is £50,000, keeping you within the basic rate band. The rental profit is taxed at 20%, giving £2,000 in income tax on the rental income.
Allowable Expenses
You can deduct the following expenses from your rental income before calculating taxable profit:
- Letting agent fees and management costs
- Buildings and contents insurance
- Maintenance and repairs (but not improvements)
- Ground rent and service charges
- Council tax and utility bills (if you pay them)
- Accountancy fees for preparing rental accounts
- Advertising for tenants
- Legal fees for lets of a year or less
You cannot deduct the cost of improvements (such as an extension or a new kitchen where none existed before), nor can you claim capital allowances on residential property.
The Property Income Allowance
If your total rental income (before expenses) is £1,000 or less per year, it is tax-free under the property income allowance. You do not need to declare it to HMRC. If your income exceeds £1,000, you can choose to either deduct the £1,000 allowance instead of actual expenses, or claim actual expenses in the normal way — whichever gives a better result.
Section 24: Mortgage Interest Restriction
Before April 2020, landlords could deduct mortgage interest as an expense, directly reducing taxable profit. Under Section 24 (fully phased in from April 2020), mortgage interest is no longer deductible. Instead, landlords receive a 20% tax reduction worked out on the lower of their finance costs, their property profits and their income above the Personal Allowance (any excess is carried forward).
This change particularly affects higher-rate (40%) and additional-rate (45%) taxpayers. Previously, a higher-rate taxpayer could deduct mortgage interest at 40% relief. Now they receive only 20% relief, so the net cost of the mortgage interest rises.
Example: You receive £12,000 in rent and pay £6,000 in mortgage interest, plus £2,000 in other expenses.
- Old system: Taxable profit = £12,000 - £6,000 - £2,000 = £4,000. At 40% = £1,600 tax.
- Section 24: Taxable profit = £12,000 - £2,000 = £10,000. At 40% = £4,000 tax. Less 20% credit on £6,000 interest = £1,200 credit. Net tax = £2,800.
The tax bill rises from £1,600 to £2,800 — a 75% increase.
From April 2027: separate property rates
From 6 April 2027 rental profit in England, Wales and Northern Ireland is taxed at its own property rates instead of the main income tax rates. Finance Act 2026 set them at 22%, 42% and 47%, and Budget 2026 announced a further two points, to 24%, 44% and 49%, which still needs Finance Bill 2026-27. The mortgage interest credit rises with the property basic rate, so it becomes 24% rather than 20%. Our Budget 2026 guide for landlords has the detail, and the rental income tax calculator shows the effect on your own figures.
Wear and Tear Replacement Relief
For residential lets (furnished, part-furnished or unfurnished), you can claim the cost of replacing domestic items (sofas, carpets, appliances) as an expense, but only the replacement cost — not the cost of the original items. The old 10% wear and tear allowance was abolished in April 2016.
Reporting Rental Income
You must report rental income on a Self Assessment tax return if it is more than £2,500 after allowable expenses, or £10,000 before expenses; if you do not usually file a return, register by 5 October after the tax year. If income is between £1,000 and £2,500, contact HMRC about how to report it.
Key Takeaway
Rental income is taxed at your marginal rate, and Section 24 has removed the ability to fully offset mortgage interest for higher-rate taxpayers. Understanding the interaction between your employment income and rental profits is essential to managing your tax bill. Use our rental income tax calculator to model different scenarios.