What tax do Scottish landlords pay on UK rental income?

Article provided by GoSimpleTax.

Sometimes people become “accidental landlords”, for example, after inheriting a property which they rent out rather than sell. In other cases, people move to another UK or overseas location and rent out their former home, which provides welcome additional income, as well as a sound retirement investment.

If you’ve just become a residential landlord or you’re interested in becoming one, naturally you’ll want to know the answer to one key question – “how much UK tax will I pay on my rental income?”

How much tax will you pay on your rental income?

  • Most UK residential landlords pay tax on their rental income via Self Assessment, the system UK tax authority HMRC uses to collect Income Tax.
  • You don’t pay tax on the first £1,000 of property rental income. This is called your Property Allowance. However, you can’t claim your Property Allowance if you claim allowable expenses (see below). 
  • If your annual property income is between £1,000 and £2,500 a year, contact HMRC for advice on reporting your rental income.
  • You must report your rental income via a Self Assessment tax return if it’s £2,500-£9,999 after allowable expenses or £10,000-plus before allowable expenses.
  • Allowable expenses are costs that HMRC allows you to deduct from your rental income. The higher your total allowable expense claim, the lower your tax bill.

Need to know!

To pay tax via Self Assessment you must first register with HMRC. If you don’t normally file a tax return, you must register for Self Assessment by 5 October following the end of the tax year (5 April) within which you had rental income to report.

Your rental income will be added to your other taxable income and once allowances and reliefs have been claimed, you’ll be taxed on what’s left. The Income Tax band into which you fall will determine the size of your tax bill. Those taxpayers that live in Scotland have different rates to the rest of the UK. Scottish tax rates are as follows:

  • No tax is payable on annual taxable income of up to £12,570. This is your tax-free Personal Allowance.
  • The starter rate of 19% is payable on taxable income of £12,571 to £14,732
  • The basic rate of 20% is payable on taxable income of £14,733 to £25,688.
  • The intermediate rate of 21% is payable on taxable income of £25,689 to £43,662.
  • The higher rate of 41% is payable on taxable income of £43,663 to £150,000.
  • The top rate of 46% is payable on taxable income of more than £150,000 (*all figures 2022/23 tax year). 

Claiming allowable expenses

For an expense to be allowable/deductible, it must result “wholly and exclusively” from renting out your property. If you use something for personal and landlord reasons, such as a mobile phone, you can only claim allowable expenses for calls you make for renting out and managing your property.

You claim allowable expenses by summarising them within your Self Assessment tax return, as well as your rental income and other sources of taxable income. Then HMRC will tell you how much Income Tax you owe.

Need to know! The online filing deadline for your Self Assessment tax return is midnight on 31 January following the end of the tax year in which you had taxable income. The UK tax year runs from 6 April until 5 April.

What allowable expenses can landlords claim?

Allowable expenses that landlords can claim can include:

  • property maintenance and repairs
  • ground rents and service charges
  • redecorating between tenancies
  • insurance
  • water rates, council tax, gas and electricity (if you pay them for the property)
  • gardening and cleaning costs
  • letting agent fees/management fees
  • legal fees for lets of a year or less
  • accountancy/bookkeeping fees
  • direct costs (eg phone calls, stationery and advertising for new tenants)
  • vehicle/fuel costs (only those relating to renting out your property)
  • costs for disposing of old items of furniture or electrical appliances, etc.

What expenses can’t landlords claim?

You cannot claim mortgage capital repayments as an allowable expense. Neither can you claim for mortgage interest payments or other finance-related costs (eg mortgage-arrangement fees). Instead, you get a 20% tax credit to cover such outgoings.

When replacing things, for example, a toilet or burglar alarm, you cannot claim a full allowable expense if the replacement is of superior value. You can only claim for a “like for like” amount as an allowable expense. 

Improving a property, for example, by adding an extension, cannot be claimed as an allowable expense, because you’re making a “capital improvement”. Later, if you sell the property, you may be able to claim capital expenses against Capital Gains Tax.

Need to know! You can’t claim an allowable expense for replacing sofas, beds, carpets, curtains, furnishings, white goods, etc in a furnished or part-furnished rental property. But you might be able to claim Replacement Domestic Items relief, which will also reduce your Income Tax bill. Once again, you cannot claim for something of superior value.

What about undeclared rental income?

If, for whatever reason, you’ve earned rental income that you haven’t reported via Self Assessment, you can tell HMRC about it by means of a “voluntary disclosure”. There may be a penalty to pay, but it will be lower than it would be if HMRC finds that you’ve failed to report taxable rental income.

About GoSimpleTax

Our software submits directly to HMRC and is the digital solution for Landlords to record income, expenses and file their self-assessment giving hints on savings along the way.

Covering all self-assessment pages, not just property, GoSimpleTax does all the calculations for you saving you ££’s on accountancy fees.

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