One of the most common misunderstandings new landlords have is thinking they’ll pay tax on every pound of rent they collect. You won’t. HMRC taxes your rental profit, not your rental income. Understanding the difference could save you hundreds — or thousands — each year.
The Basic Difference
Rental income is the total rent you receive from tenants. If you charge £1,000 a month, your rental income is £12,000 a year.
Rental profit is what’s left after you subtract your allowable expenses. If you have £4,000 in legitimate costs, your rental profit is £8,000 — and that’s the figure you pay tax on.
The formula is simple:
Rental Income − Allowable Expenses = Rental Profit (Taxable Amount)
What Counts as Allowable Expenses?
HMRC lets landlords deduct a wide range of costs directly related to letting the property. Common allowable expenses include:
- Letting agent fees and property management costs
- Buildings and landlord insurance
- Ground rent and service charges (for leasehold properties)
- Council tax and utility bills (if you pay them, not the tenant)
- Accountancy fees for rental accounts
- Legal fees for leases under a year or tenant disputes
- Repairs and maintenance (but not improvements)
- Replacing furniture and appliances in furnished lets
- Advertising costs for finding tenants
- Travel costs to inspect or manage the property
Every pound you legitimately claim reduces your taxable profit by a pound.
A Worked Example
Let’s say Sarah owns a flat she rents out for £950 per month.
| Amount | |
|---|---|
| Annual rental income | £11,400 |
| Less: Letting agent fees | −£1,368 |
| Less: Landlord insurance | −£280 |
| Less: Repairs (new boiler thermostat) | −£150 |
| Less: Gas safety certificate | −£60 |
| Less: Accountant fees | −£200 |
| Rental profit (taxable) | £9,342 |
Sarah pays tax on £9,342, not £11,400. If she’s a basic rate taxpayer (20%), that’s a difference of £411 in tax saved simply by claiming legitimate expenses.
What About Mortgage Payments?
Here’s where landlords often get confused. Your mortgage has two parts:
Capital repayment — the bit that pays off the loan. This is never deductible. You’re buying an asset, not incurring an expense.
Interest — the cost of borrowing. This used to be fully deductible, but since April 2020, you can only claim a 20% tax credit instead. It doesn’t reduce your rental profit directly; instead, it reduces your final tax bill.
So when calculating rental profit, don’t subtract your mortgage payments. Handle the interest separately when working out your tax.
The Property Income Allowance Alternative
If your expenses are low, you might be better off using the £1,000 property income allowance instead. This lets you earn up to £1,000 in rental income completely tax-free, no questions asked.
But you can’t have both. It’s either the £1,000 allowance or your actual expenses — whichever benefits you more.
For most landlords with mortgages, insurance, and agent fees, actual expenses will exceed £1,000, making them the better choice.
Why This Matters
Many landlords — especially accidental ones who inherited a property or couldn’t sell — don’t realise how much they can legitimately deduct. They over-report their taxable income and pay more than they need to.
Keep records of everything you spend on the property. Bank statements, invoices, receipts — all of it. At tax return time, you’ll be glad you did.
The rent you receive is just the starting point. What matters for tax is the profit that’s left after your costs.
Keep records of all property expenses for at least six years in case HMRC enquires.