Guide · 4 minute read · Updated 10 Jul 2026

How is rental income taxed?

Rental profit is added to your other income and taxed at your marginal rate, so 20%, 40% or 45%. The tax lives in the details: what you can deduct, how mortgage interest is treated, and the new digital reporting rules that start in April 2026.

Profit, not rent, is what you are taxed on

You pay tax on rental profit, which is the rent received minus allowable running costs. Allowable expenses include letting agent fees, landlord insurance, repairs and maintenance (not improvements), ground rent, service charges, and the cost of replacing furnishings. Get these right and the taxable figure is often much lower than the rent.

If your total rental income for the year is £1,000 or less, the property allowance covers it and you need not report it at all. Above that you can either deduct your actual expenses or claim the flat £1,000 allowance instead, whichever gives the lower tax. For most landlords with real costs, actual expenses win comfortably.

The mortgage interest trap: Section 24

Here is the change that catches landlords out. Mortgage interest is no longer a deductible expense. Instead you get a tax credit worth 20% of the interest, the same for everyone regardless of tax band. This is the Section 24 rule, fully in force since 2020.

For a basic-rate landlord it makes little difference. For a higher-rate landlord it stings, because relief is given at 20% while the rental profit is taxed at 40%. You are effectively taxed on income you never kept.

A worked example

Say you receive £15,000 in rent, spend £3,000 on non-finance expenses and pay £5,000 in mortgage interest, and you are a higher-rate taxpayer.

Your taxable profit is £15,000 minus £3,000, which is £12,000 (the interest is not deducted here). Tax at 40% is £4,800. You then subtract the 20% interest credit, which is £1,000, leaving a bill of £3,800.

Under the old rules, where interest was deductible, your profit would have been £7,000 and the tax £2,800. Section 24 has cost this landlord £1,000. If you are close to the higher-rate threshold, the extra profit on paper can also tip you into a higher band, so the effect can be larger than it first looks.

Reporting: Self Assessment and Making Tax Digital

Rental income is declared through Self Assessment. If your property income (before expenses) is above £1,000 you generally need to register and file a return by 31 January after the tax year ends.

From 6 April 2026, Making Tax Digital for Income Tax begins. Landlords with gross income from property and self-employment above £50,000 must keep digital records and send HMRC quarterly updates through compatible software, replacing the single annual return with four updates plus a year-end declaration. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028, so most landlords will be pulled in over the next few years. If you are near £50,000, start looking at software now rather than in a rush next spring. Estimate your bill first with the self-employed tax calculator.

Common questions

How much rental income can I earn before paying tax?

The property allowance lets you receive up to £1,000 of rental income a year tax-free with nothing to report. Above £1,000 you must declare it, and you pay income tax at your marginal rate on the profit after allowable expenses.

Can I deduct my buy-to-let mortgage from rental income?

Not as an expense. Since 2020 mortgage interest is given as a 20% tax credit instead of a deduction. A higher-rate landlord paying £5,000 of interest gets £1,000 off the tax bill, not relief at 40%, which is the Section 24 restriction.

When does Making Tax Digital start for landlords?

From 6 April 2026 for landlords with gross property and self-employment income above £50,000, who must keep digital records and file quarterly. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028.

How do I report rental income to HMRC?

Through Self Assessment. Register by 5 October after the first tax year you have taxable rental profit, then file the return and pay by 31 January. Once Making Tax Digital applies, you switch to quarterly digital updates plus a year-end declaration.

Guidance and education, not regulated financial advice.