Tax on rental income

tinamc_2

I currently rent out a property which I own (achieving £500 per month) I have a small mortgage on the property (25k).
Am I better to pay off the mortgage and pay tax on the income or retain the mortgage. I currently pay 20% tax and the rental income would not take me to the next tax bracket. Does this mean I would be paying £1500 per year tax on the rental income of £75000 per annum?

mlz1413

£1500 for 20% tax would be on £7,500pa which is £625pm rental - are these your figures? as you did say £500pm rent which is only £6000pa

Also your mortgage of £25,000 what interest rate are you paying?

Assuming:
500 x12 = 6000 rent in with no expenses @ 20% = £1,200 tax due
mortgage @ 5% = 1250pa interest which would reduce tax to £950pa

Look up tax form IR150 for full details of allowable expenses

00ec25

what is your objective with this rental? you need a business plan!

1. are you looking to capital growth only and therefore are not interested in making a (real) net profit after tax ?

or

2. do you need the rental income (after tax) on a monthly basis to support your general standard of living ?


If 1 - do not pay off the mortgage but hope and pray that capital growth over a long term gives at least a 6 -10% annualised return otherwise the investment is performing badly

if 2 - pay off the mortgage and budget accordingly, but only once you have worked out the real net rental yield after all legitimate tax deductions. Even then, if you are paying off the £25k in a lump sum, then you need to do an investment appraisal to see if you could get a better return comparing your net rental yield (%) against other forms of lump sum investment (%)

Hint - professional LL plan for a rental yield as well as capital growth