Rental Income Tax
Calculator 2025/26
Add one or more rental properties to see your total tax bill, the Section 24 squeeze on higher-rate taxpayers, your net yield after tax, and whether a limited company structure would reduce your liability. The band-push effect — where mortgage interest inflates your taxable income into the 40% band — is shown explicitly.
How rental income is taxed in 2025/26
Rental profits — rent received minus allowable expenses — are added to your other income and taxed at your marginal Income Tax rate. Unlike a salary, there is no NI to pay on rental income, but there’s also no personal allowance specifically for rental income; it sits on top of everything else you earn.
The key misunderstanding among landlords is that rental income is taxed as though it is the “top slice” of your income. If you have a £40,000 salary and £15,000 rental profit, you are effectively a higher-rate taxpayer on the rental profit even if your salary alone would keep you in the basic-rate band.
Section 24 — the mortgage interest restriction explained
Before April 2017, landlords could deduct their full mortgage interest from rental income before calculating tax — the same way any business deducts finance costs. Section 24 of the Finance (No.2) Act 2015 phased this out. Since April 2020, no landlord can deduct mortgage interest from rental profits. Instead, you receive a 20% tax credit on your finance costs — equivalent to basic-rate relief only.
This creates a significant hidden cost for higher-rate taxpayers:
Rental income: £18,000. Mortgage interest: £10,000. Other expenses: £2,000.
Under old rules (pre-2017): Taxable profit = £18,000 − £10,000 − £2,000 = £6,000. Tax at 40% = £2,400.
Under Section 24: Taxable profit = £18,000 − £2,000 = £16,000 (interest not deducted). Tax at 40% = £6,400. Less 20% credit on interest = −£2,000. Tax due = £4,400 — nearly double the pre-2017 bill.
The actual cash profit is the same (£6,000) but the tax bill has almost doubled. For landlords with large mortgages relative to rental income, Section 24 can mean a tax bill that exceeds the actual cash profit — effectively paying tax on a loss.
The band-push problem
Because mortgage interest is no longer deducted before calculating taxable income, rental income can push you into a higher tax band even when your actual profit after interest is modest. The calculator shows this explicitly — your income band before and after rental income is added, and whether Section 24 has moved you from basic to higher rate.
The most effective counter to band-push is pension contributions. Each pound paid into a personal pension reduces your adjusted net income, potentially bringing you back below the 40% threshold. The pension contribution field in the calculator above lets you model this directly.
Allowable expenses for landlords
You pay tax on profit, not rent. Deductible costs include:
- Letting agent fees — management fees, tenant-finding fees, renewal fees
- Repairs and maintenance — fixing existing features (not improvements or additions)
- Buildings and contents insurance
- Ground rent and service charges (leasehold properties)
- Council tax (if you pay it, e.g. between tenancies)
- Utility bills (if included in rent)
- Accountancy fees for preparing rental accounts
- Advertising costs
- Legal fees for tenancy agreements, eviction costs
- Travel costs to visit the property for maintenance purposes
You cannot deduct capital improvements (new kitchen, extension), the cost of purchasing the property, or personal expenses. Replacing like-for-like is maintenance; upgrading is capital expenditure (and may reduce CGT when you sell).
| Allowable | Not allowable |
|---|---|
| Repairing a broken boiler | Installing a new boiler as an upgrade |
| Repainting walls | Structural improvements / extensions |
| Replacing like-for-like fixtures | First-time furnishing costs |
| Professional fees (accountant, solicitor) | Legal fees for buying the property |
| Mortgage interest (as 20% credit) | Mortgage capital repayments |
Should you own rental property in a limited company?
Since Section 24 doesn’t apply to companies — limited companies can still deduct mortgage interest in full — many landlords have considered moving properties into a corporate structure. The analysis is complex but the key points are:
- Corp tax advantage: Companies pay 19–25% corporation tax on rental profits and can deduct mortgage interest fully. A higher-rate individual pays 40% on the same profits with only a 20% credit on interest.
- Transfer cost: Moving an existing property into a company triggers Stamp Duty (3% surcharge plus main rates) and potentially CGT on the “disposal.” For most existing landlords, the transfer costs outweigh the tax savings for many years.
- Extraction cost: Profits still need to come out eventually — as salary or dividends — which adds personal tax on top of corp tax.
- Mortgage availability: Most lenders have separate — often more restrictive or expensive — product ranges for limited company buy-to-let.
- Better for new purchases: For landlords buying additional properties and planning for the long term, purchasing through a company from the start avoids the transfer costs entirely.
From April 2026, landlords with qualifying income above £50,000 must file quarterly digital updates to HMRC under Making Tax Digital. From April 2027 the threshold drops to £30,000. This requires HMRC-recognised software. If you’re approaching these thresholds, setting up compliant digital record-keeping before April 2026 avoids a last-minute scramble.
Frequently asked questions
CGT when you sell, stamp duty on purchase, IHT on your estate — all the numbers landlords need.
