Paying tax on a rental property is a normal occurrence, something everyone with an investment property has to do.
This tax is paid the same way as if you worked self-employed, by submitting yearly self-assessments based on the type of income you received.
How To Work Out The Tax Payable
Class 2 National Insurance is only payable if your profits are more than £6,725 a year, and what you do counts as running a business.
For example, being a landlord is your primary job, you rent out more than one property, or you’re buying new properties to rent out.
If you make profits under the threshold of £6,725 per year, you can make voluntary Class 2 National Insurance contributions to ensure you get the full state pension.
The first £1,000 of income from property rental is tax-free, as this is your ‘property allowance’ relating to paying tax on a rental property.
Further to that, you must report it on a self-assessment tax return if it’s:
- £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses
Register for self-assessment and get it logged!
Being caught out later on or having to declare unpaid tax will incur a penalty!
How To Submit And The Process Of Paying Tax On A Rental Property
Register for self-assessment, usually in the following tax year to which you started gaining rental income – this’ll lead up to the process of paying tax on a rental property.
Enlisting an accountant to oversee this could help you in the long run, well worth the cost. They’re the most knowledgeable when it comes to recording and accounting for tax deductibles to ensure you’re not unknowingly overpaying tax!
More on tax deductibles and finding the right accountants next though!
What Are Tax Deductibles?
There are costs associated with a rental property that you can claim to reduce tax, winner!
There are different tax rules depending on whether you rent out a residential, furnished holiday, or commercial property though. Be mindful of this…
More specifically relating to a residential property, you’re liable to pay tax on the profit you make from renting out the property after deductibles for ‘allowable expenses.
Allowable expenses are things you need to spend money on in the day-to-day running of the property, such as:
- Letting agent fees
- Legal fees for lets of a year or less, or renewal of a lease less than 50 years remaining
- Accountant fees
- Building and contents insurance
- Maintenance and repairs to the property (not improvements)
- Utility bills, such as gas, water, and electricity
- Rent, ground rent & service charges
- Council tax
- Services you pay for, such as cleaning & gardening
- Other direct costs of letting a property are phone calls, stationery, and advertising.
A specialist accountant who deals with letting properties will be better equipped to deal with these factors, helping you run an efficient accounting spread, and potentially save you money as opposed to if you did it yourself.
Finding The Right Accountant
The right accountant will need to find out your plans for the future, and what you’d like to achieve over the next few years before they can make suggestions and give good tax advice.
If they make bold statements such as – you should be investment property in a limited company – without fully evaluating your wants and needs moving forward, they likely won’t be the best fit as they’ll have pulled that suggestion off a generic template.
An accountant should be a proactive advisor, looking at your circumstances and upcoming obstacles, and guiding you in the best way they see fit to help reduce risks.
If you have friends or family with an investment property, ask who their accountant is. Failing that, look for accountants that specifically advertise property services, and always, always, check Google Reviews.
What I Can Do To Help Make The Process Easier Paying Tax On A Rental Property
Enlist a letting agent to oversee the management of your tenancy.
This is usually included, fully documented and drafted statements of income and expenditure, as and when you need them.
Records of invoices paid, as well as all tax deductibles, are recorded.
It will make the process as seamless as possible to gather all the necessary documents to hand straight over to your accountant.
Get in touch with our property experts, we can help oversee your property and its tenancy, making your life 10x easier!