As a landlord, you are required to pay income tax on all rental income you receive on all your properties. Being a significant part of owning and managing a rental property, all landlords should know how to do this properly to avoid potential penalties. Fortunately, rental income tax calculators make things easier, but landlords should understand how their rental income tax is calculated and other nuances to get accurate results.
What Taxes Do London Landlords Pay?
Landlords pay income tax on any profit they receive from their rental properties. To get the taxable amount, you add all their income and subtract all expenses and allowances. It is important to understand that all other payments for additional services you provide besides renting are also taxable.
Some landlords receive payments for cleaning communal areas, utilities, and repairs that are all taxable. All non-refundable deposits are also termed as income and are, therefore, to be included in your rental income when calculating your tax.
Keeping track of all payments can sometimes be challenging, especially if you own multiple properties. In such cases, a property management company like UpperKey can take care of the finer details so you get peace of mind knowing everything is being handled properly.
About Tax Relief
Landlords are also entitled to tax relief that depends on how they rent their property and how much they make doing so. You can either be a buy-to-let landlord who rents out their entire property or a live-in landlord who rents out space in a home or property they live in.
Remember that the buy-to-let model covers landlords running holiday lets, including those renting their homes or second properties on Airbnb.
If you rent out your whole property, you can claim a £1000 property income allowance, while those renting a room in their home or property can claim a £7500 Rent-a-Room allowance. This means if your rental income is below these amounts depending on the type of property you own, you do not pay any tax.
You can also claim tax relief on your mortgage payments. This works out to 20% of the interest you pay for your mortgage.
Landlords with a rental income of less than £12,570 do not have to pay income tax if they do not have any other source of income. This amount is the maximum personal tax allowance, and it is deducted from the total taxable income when calculating your income tax.
However, it is subject to change, so always check the latest guidelines from HMRC to know what it is for the current year.
How Much Tax Do London Landlords Pay?
Rental profits are taxed at the same rate as income from other sources, such as employment or business. The tax bands are 0%, 20%, 40%, and 45% depending on your income. You should understand that since rental income is added to all your other income, it can cause you to land in a higher tax bracket, leading to higher taxes.
The tax bands work as follows:
● 20% if your total taxable income is less than £50,270
● 40% for income between £50,270 and £150,000
● 45% for income above £150,000
How to Use a Rental Income Tax Calculator
Before using a tax calculator, you should gather the relevant details and find one that applies to the UK. The latter is important because rental income tax works differently in different countries. You will get inaccurate results if you use one that does not apply to your specific situation.
The important information to gather includes the rental income, income from other sources, expenses arising from running and managing a rental property, mortgage interest details, and payments from extra services you provide as a landlord.
Once you have this information, you can search online for an intuitive rental income tax calculator. Ensure you find one that accounts for your specific arrangement, whether you are a buy-to-let landlord or a live-in landlord because this will affect your tax allowance or relief calculations.
Ideally, the platform that hosts it should not use jargon that makes the process much harder than it has to be.
Once you gather all the details, all that remains is to plug the numbers into the calculator and let it work out the tax for you. Since these will be your self-assessed tax returns, UpperKey recommends hiring an accredited tax accountant to look them over before filing.
Doing so will ensure you are not missing anything, such as deductions that could lower your taxable amount, and that you are presenting an accurate assessment when filing your tax returns.
What If the Rental Income Tax Calculator Shows a Loss?
You are allowed to carry forward losses from your UK rental properties and offset them against future profits. However, you are not allowed to offset rental income losses against other sources of income.
No one wants to make a loss on a rental property and have to make additional calculations the following year. Engaging the property management services of companies like UpperKey can ensure proper management and profitability of your properties, in addition to guaranteeing income when they become your primary tenant.
What If I Own Multiple Properties?
If you do own multiple properties, you can lump together all income and expenses from all of them. This will allow you to deduct expenses on one property from another’s receipts, which can make your rental business more profitable.
However, things are very different if you own rental property outright and also own shares or part of one or more additional properties. These are treated as separate businesses, and you should pay income tax on them separately. In addition, you are not allowed to offset one’s losses or expenses against the other’s profits.
What if You Sell Your Rental Property?
You can sell your property if you no longer wish to remain a landlord. If you do so, you will need to pay capital gains tax on the property. Talk to a tax advisor who will handle all queries related to this type of tax before using a capital gains calculator to see how much tax you should pay.
Using a rental income tax calculator makes it much easier to know how much tax you should pay on your rental income. When using one, you can also find out your expenses to lower them and increase your rental income. However, you need to understand how this type of tax is calculated and how it works beforehand for the best results.