How rental income tax works
As a landlord you are taxed on your rental profit, which is your rent minus your allowable expenses. That profit is added to your salary and any other income, then taxed at your marginal rate. For 2026-27 that is 20% while your total income is under £50,270, 40% up to £125,140, and 45% above that. Because the profit sits on top of your other income, a job that already fills the basic-rate band pushes your rental profit into the 40% bracket. There is no separate personal allowance for property: the same £12,570 has to cover everything you earn.
Mortgage interest and Section 24
This is the rule most landlords get wrong. Since April 2020, mortgage interest is no longer an allowable expense. You cannot take it off your profit. Instead you get a 20% tax credit on the interest, applied after the tax on your profit is worked out. For a basic-rate landlord that credit matches the 20% they would have saved by deducting it, so nothing changes. For a higher-rate landlord it does not: the profit is taxed at 40% while the relief is stuck at 20%, so the same mortgage now costs more in tax. That gap is why plenty of higher-rate landlords pay tax on paper profits that are far bigger than the cash they take home. The calculator above shows both figures so you can see it.
Allowable expenses and the £1,000 property allowance
The expenses you can deduct are the day-to-day running costs of letting: repairs and maintenance, letting agent and management fees, landlord insurance, ground rent and service charges, council tax and utility bills where you pay them, and accountancy fees. Improvements that add value, such as an extension, are not deductible against income but may reduce capital gains tax when you sell. If your total expenses come to less than £1,000, you can claim the flat £1,000 property allowance instead, and if your rental income is £1,000 or less you do not need to report it to HMRC at all.
A higher-rate landlord example
Take £15,000 of rent, £3,000 of expenses, £6,000 of mortgage interest and a £60,000 salary. Your taxable profit is £12,000, because interest is not deducted. That £12,000 sits entirely in the higher-rate band, so the tax on it is 40%, or £4,800. The mortgage interest credit is 20% of £6,000, which is £1,200, giving a final tax bill of £3,600. Your actual cash profit is only £6,000 once you pay the interest, so a £3,600 bill is an effective 60% of the money you made. Under the old rules you would have deducted the interest and paid noticeably less. This is Section 24 in a single example.
Frequently asked questions
How much tax will I pay on my rental income?
You pay tax on your rental profit, which is your rent minus allowable expenses such as repairs, letting fees and insurance. That profit is added to your other income and taxed at your marginal rate: 20% if you are a basic-rate taxpayer, 40% at the higher rate, or 45% at the additional rate for 2026-27. Mortgage interest is not deducted from profit. Instead you get a 20% tax credit on the interest. On £12,000 of profit with £6,000 of mortgage interest, a higher-rate landlord pays 40% of £12,000, which is £4,800, less a £1,200 interest credit, so £3,600.
Can I still deduct mortgage interest from my rental income?
No. Since April 2020, under what is known as Section 24, mortgage interest is no longer an allowable expense for individual landlords. You cannot take it off your rental profit. Instead you get a basic-rate tax credit worth 20% of the interest, applied after the tax on your profit is worked out. For a basic-rate landlord the effect is broadly the same as the old rules. For a higher or additional-rate landlord it is worse, because the profit is taxed at 40% or 45% while the relief is fixed at 20%. Companies that own property are not affected by Section 24 and can still deduct interest in full.
Is rental income taxed at 40%?
Only the part of your total income that falls in the higher-rate band is taxed at 40%. Rental profit is stacked on top of your other income, so if your salary already uses up the basic-rate band, your rental profit is taxed at 40%, up to £125,140, then 45% above that. If your total income stays under £50,270, your rental profit is taxed at 20%. So a landlord with a £30,000 salary and £8,000 rental profit pays 20% on the profit, while one with a £60,000 salary pays 40%.
What is the 20% tax credit for landlords?
It is the mortgage interest tax credit introduced by Section 24. Rather than deducting your finance costs as an expense, you calculate the tax on your full rental profit, then reduce that tax bill by 20% of your mortgage interest. The credit is capped at 20% of the lower of your finance costs, your rental profit, or your income above the personal allowance. It can reduce your tax to nil but is not refundable, so any unused amount is carried forward to a later year rather than paid back.
How much rental income is tax-free in the UK?
The first £1,000 of rental income is covered by the property allowance and does not need to be reported to HMRC. Above £1,000 you deduct either the £1,000 allowance or your actual allowable expenses, whichever is greater, then pay tax on what is left. Beyond that, rental profit uses your normal personal allowance of £12,570, but that same allowance also has to cover your salary and other income, so most landlords with a job have already used it up.
How can I reduce the tax on my rental income?
Legitimate options include claiming every allowable expense, such as repairs, letting agent fees, insurance, ground rent and service charges, and using the £1,000 property allowance if your expenses are lower than that. Couples who own jointly can split the income, and a spouse in a lower tax band pays less on their share. Some landlords hold property through a limited company, where mortgage interest is still fully deductible, though that brings its own costs and a possible capital gains tax charge to move existing property in. This tool is a guide, so speak to an accountant before restructuring.
This tool is a guide, not tax or financial advice.
