Rental income can be a great source of additional income, but it also comes with tax responsibilities. Fortunately, there are several legitimate ways to reduce the amount of tax you pay on rental income in the UK. Here’s how:
1. Claim Allowable Expenses
You can deduct expenses incurred in renting out your property, including:
- Mortgage interest (restricted to basic rate for residential properties)
- Repairs and maintenance
- Property management fees
- Insurance (e.g., landlord insurance)
- Utility bills (if paid by you as the landlord)
Make sure to keep detailed records and receipts for all expenses.
2. Utilise the Property Allowance
Landlords can claim a £1,000 property allowance annually. If your expenses are less than £1,000, you can claim this allowance instead of deducting actual expenses.
3. Split Income with Your Spouse
If you own the property jointly, consider splitting the rental income to take advantage of both personal allowances and lower tax bands. This can be beneficial if one spouse is in a lower tax bracket.
4. Use the Rent-a-Room Scheme
If you rent out a furnished room in your own home, you can earn up to £7,500 per year tax-free under the Rent-a-Room scheme.
5. Offset Losses
If you make a loss from renting out your property, you can carry it forward and offset it against future rental profits, reducing your tax liability.
6. Consider Incorporation
Setting up a limited company to own rental properties can be tax-efficient, as companies pay corporation tax (currently lower than higher-rate income tax). However, this comes with costs and administrative requirements, so seek professional advice.
7. Capital Gains Tax Planning
If you plan to sell your rental property, consider the timing to make the most of your Capital Gains Tax (CGT) allowance (£6,000 for 2024/25). Also, expenses like estate agent fees and legal costs can reduce your taxable gain.
Final Thoughts
It’s important to use legal and HMRC-approved methods to reduce your tax liability. If you’re unsure about the best approach for your situation, consult a qualified accountant or tax advisor.
Need Help?
Navigating property tax can be complex. Contact us to learn how you can optimise your tax strategy and maximise your rental income.