Landlord Tax Relief for Beginners: Rules & Changes (2023 Update)

Private landlords pay tax when they buy a property (stamp duty), when they rent it (income gains tax) and when they sell it (capital gains tax). Landlords who manage their properties through a limited company pay corporation tax.

Find our full guide to Buy to Let property taxes here.

All taxes associated with letting properties (sometimes called landlord tax) are paid by the property owner or owners. It doesn’t matter if the money isn’t touching your bank account, if the mortgage is in your name then you’re responsible for paying any tax. This applies even if someone else manages the property for you.

Landlords are entitled to £1,000 tax-free property allowance. If you’re earning more than £1,000, you have to tell HMRC by filing a tax return (if you’re earning less, you don’t have to file a tax return and you can stop reading now).

The amount or rate of income tax you need to pay depends on what you earn. This tax year (2022-2023), the amount of tax-free income you’re allowed is £12,570. If you earn £12,571 to £50,270 then you pay a basic tax rate of 20%. If you earn over £50,270, you pay a higher rate tax of 40% on any earnings between £50,271 and £150,000. Those who earn over £150,000 pay a tax rate of 45% on any earnings over £150,000.

If you own several rental properties, profits from all the properties are combined into one figure.

Relief: You can sometimes transfer allowances within a marriage or civil partnership, or in a business partnership. As long as it’s clear where all the money is going!

As a self-employed landlord, you’re also entitled to a £1,000 trading allowance, which provides a way of claiming a flat rate for business expenses instead of adding them all up individually. (You can’t do this  if you’re a limited company.) The trading allowance is usually only used by low-income businesses because those earning more will usually have more than £1000 worth of business expenses. In a nutshell: the trading allowance is only really applicable if you’re earning around £1000-£2000 from your property.

Generally, you’re allowed to claim for anything you exclusively purchase to help you rent out your property.

But this doesn’t mean everything is covered. It’s usually just the money you spend on the  general maintenance of the property and any necessary improvements e.g.:
– General maintenance of the property and grounds including repair costs;
– Insurance (landlords’ contents, etc);
– Cost of services for maintenance (cleaners, gardeners, ground rent);
– Agency and property management fees.

Watch this space for our upcoming guide to landlord business expenses. 

The income tax basic and higher rate thresholds were frozen as a response to the pandemic, and will still be frozen for the year 2023-24. So there won’t be any income tax changes to be aware of for a while yet. This freeze was done to help the UK economy recover after Covid-19; when tax bands are frozen it ‘drags’ some people into a higher tax band as they earn more.

Last year (2022), there was a change to the tax rate for dividend payments. This only affects people who own a limited company and pay themselves with dividends, as opposed to sole traders. If you do run your landlord business through a limited company, you should be aware that the dividend tax rate went up by 1.25% in April 2022. There’s still a £2000 annual dividend allowance – so you don’t pay any tax on dividends under that amount. For anything over that amount, the new rates are:

– 8.75% for basic rate taxpayers
– 33.75% for higher rate taxpayers
– 39.35% for additional rate taxpayers 

Landlords used to be able to deduct mortgage interest repayments and allowable expenses from their rental income, but this has been gradually phased out.

Since 2020 the new tax rules have been firmly in place. That means landlords are now taxed on their total annual income (including income from any other employment) and can only claim tax relief at the basic rate of 20% on whichever figure is lower:

– Finance costs (inc mortgage interest payments, loan repayments, overdrafts);
– Profit from rental income (minus allowable expenses);
– Total income (anything other than savings and dividend income above the personal allowance after deducting losses and tax relief).

So, if you were claiming your interest-only mortgage as an expense prior to 2020, you’re now not able to do this. You can just claim a 20% relief on the lowest of the above instead. For most landlords, this will be the finance costs.

Some landlords might find they’re pulled into a higher tax bracket because of these changes – something to watch out for.