Understanding Income Tax and Rental Income
When it comes to income tax, rental income is a significant factor. After subtracting allowable expenses, rental income is combined with your other sources of income, including savings and dividends, for tax purposes. If you’re married and jointly own a property, the income is typically divided equally between you and your spouse, unless you have specific arrangements in place and have notified HMRC. Remember, these arrangements cannot be applied retroactively.
The amount of tax you owe varies based on your unique circumstances, the nature of your income, and any tax reliefs you may be eligible for.
Tax Rates for Rental Income
For taxpayers under 65 years old with no other income or tax reliefs, the tax rates for rental income in the UK for the tax years 2021/22 to 2025/26 are as follows:
Personal Allowance: £12,570 (0% tax)
Basic Rate: Up to £37,700 (20% tax)
Higher Rate: Up to £112,300 (40% tax)
Additional Rate: Over £150,000 (45% tax)
Please note that the government has announced a freeze on personal allowances and basic rate bands until April 5, 2026. The rates for income tax in Scotland may differ, and you can find them on the Scottish Government’s official website.
The personal allowance gradually reduces by £1 for every £2 of income over £100,000, effectively resulting in a 60% tax rate on income between £100,000 and £125,140 for the tax years 2021/22 to 2025/26.
If you have income from employment, self-employment, or pensions, this income is considered before and can push your rental into a higher tax bracket. The tax rates for dividends are different from those for rental income.
National Insurance Considerations
In most cases, National Insurance Contributions are not applicable to rental income, unless you’re renting out surplus accommodation as part of your trade, and the rent received is included in your trading profits.
Tax Credits and Child Benefit
Tax credit calculations combine the incomes of both you and your partner if you live together, treating your net rental income as other income. If the combined income falls below £300, tax credits either treat it as zero or deduct £300 from the total.
For child benefit, if either you or your partner’s income exceeds £50,000, the benefit is reduced proportionally between £50,000 and £60,000, and it’s completely eliminated if income surpasses £60,000. The tax system collects the excess child benefit. While you can cancel Child Benefit, it’s advisable not to do so in case your income unexpectedly decreases because Child Benefit can only be backdated for three months.
In summary, your income tax liability depends significantly on your rental income, and it’s crucial to consider how it fits into your overall financial situation.
