When you’re letting a property, you will need to pay tax on the profits you make. The tax due is different depending on whether the property is personally owned or company owned. Generally, private landlords will pay income tax and limited company landlords corporation tax on profits.
When you own a property personally in your name, the rental profit is added to your other earnings (such as from your job) and taxed as income. Private landlords need to complete a self-assessment tax return if the income from their property is:
£2,500 to £9,999 after allowable expenses
£10,000 or more before allowable expenses
If you make between £1,000 and £2,500 per year, you must make HMRC aware in order to pay tax.
|Earnings||Income tax rate|
|£0 - £12,750||Tax-free personal allowance|
|£12,750 - £50,270||Basic rate 20%|
|£50,271 - £125,140||Higher rate 40%|
|£125,140+||Additional rate 45%|
If you are running a ‘property business’ and your profits are £6,515 a year or more you will also have to pay Class 2 National Insurance.
Holding property in a limited company can offer tax benefits. If you’re a higher rate taxpayer, or plan on owning multiple properties, you’ll especially find there’s a tax saving. Rental profits on properties held in a limited company are not taxed at your personal tax rate but the current rate of corporation tax, which tends to be around half of the higher rate of income tax.
|Corporation tax rate|
|Main rate: 25%|
|Small profits rate: 19%|
The corporation tax rate is currently 25% and it is calculated based on the taxable profits achieved by the end of the company financial year.
Companies making more than £250,000 profit pay the main rate of Corporation Tax but those with profits of £50,000 or less, pay the ‘small profits rate’, which is 19%. Company profits between £50,000 and £250,000 are subject to ‘Marginal Relief’ which provides a gradual increase in the Corporation Tax rate.
The upper and lower profits limits mentioned above are proportionately reduced to take account of the number of associated companies that the company has.
As an example, if a company has one other associated company, the profit limits would be as follows:
Upper limit would reduce from £250,000 to £125,000
Lower limit would reduce from £50,000 to £25,000
Generally, a company is associated with another company if they are under common control. The rules around this can be complex but typically two companies are associated if they are owned or controlled by the same individuals.
There are several tax-efficient ways to extract cash from your property investment company.
Tax-free dividends: When taking money out of a limited company, shareholders are entitled to £1000 in tax-free dividends.
Taking a salary: You could pay a salary to yourself and other family members/partners etc.
Landlords are entitled to £1,000 per year in tax-free property allowances. This means that if your annual gross income from your properties is £1,000 or less, you do not have to inform HMRC or declare this on a tax return.
Self-employed landlords (without a limited company) are also eligible for a tax-free trading allowance of £1,000. If the property is jointly owned, both parties are entitled to the £1000 property allowance.
However, this allowance can only be used in certain circumstances. You cannot use the property allowance if you:
claim the tax reducer for finance costs such as mortgage interest for a residential property
deduct expenses from income from letting a room in your own home instead of using the Rent a Room Scheme