If you are a landlord there are 2 possible ways you might be renting your property:
- You are either self employed
- You are renting through a limited company
1. If you are self employed
If you are self-employed, you will have to pay income tax on all the rental income that you receive.
To calculate the taxable income you will have to add up all the income that you received as rent. This will include the monthly rent and also any non-refundable deposits for the year. After adding the income for the whole tax year, expenses will be deducted. These are the expenses which are incurred wholly and exclusively to rent the property and also to maintain the property.
These expenses included water rates, council tax, and electricity and gas bills, phone calls, any stationery costs, letting agent`s fees and accountant fees can also be expensed.
The tax rate
The income tax that you will pay on your rental income depends on the tax band your income falls into. This means if your income from business or employment is up to £ 50 000 after the personal allowance of £12 500 you will be paying tax at 20 % that is within the basic rate. Depending on your income you will be paying tax at 40 % if you are a higher rate payer or 45 % if you are an additional rate payer.
When and how do I pay tax on the rental income?
The income tax will be paid on the rental income that you received or is due to be received during the tax year which is 6 April to 5 April the following year.
You must notify HMRC of any rental income by 5 Oct after the end of the tax year. You will have to fill in the self-assessment tax return.
31 Oct is the deadline for making a paper tax return.
31 Jan is the deadline for filing the online return the following year.
You will have to pay penalties if you are late in making the payments.
2. If you are renting through a limited company
If you are renting through a limited company, you will be paying corporation tax on all the rental income.
The taxable income will be the income that you receive by renting the property and deducting the expenses. The expense will be the expense which are incurred wholly and exclusively for the purposes of maintaining the property. This will include council bill, tax rates, gas bills and electricity bills. Accountants fees any insurance costs etc.
While renting through a limited company the landlords will be able to deduct the finance cost as an expense. You can also pay wages or dividends. You will however have to pay income tax on the wages but the first £2000 dividends are tax free.
You need to register your company to pay corporation tax when you set up your company. You can register your company by following the steps here. You must register within 3 months of incorporating the business.
When and how do I pay tax on the rental income?
There is a corporation tax return – CT 600 which you need to complete. You will need to fill the return and send it to HMRC even if you did not make any profit. The deadline for paying the tax return is 12 months after the end of the accounting period that it covers.
The deadline for the paying the corporation tax is 9 months and 1 day from the end of the accounting period of your company.
The tax rate
The corporation tax will be paid at 19%.
If you want to read more about property investment check out our blog: https://www.taxaccolega.co.uk/news/latest-news-for-business/archive/news-article/2017/february/landlords-to-receive-less-tax-relief-on-interest
There are special rules, taxes that you pay when you buy and sell rental properties. We at Taxaccolega have an expert team and we can help with all sorts of questions. Even if you want transferring your property to limited company we will advise you so that you do it in the most tax efficient way. Please free to give us a call or drop us a message by clicking here.