tax on BTL

havingaball74

Hi,
Can anyone please clarify how much tax I would pay on rental income under the new changes? I have an idea but just need to check it!
House value- £110,000
Rental per month- £525
Mortgage- £45,000
I believe that is approx a LTV ratio of 42%.
Approx monthly interest only repayments are: £150
I earn £38,000 per annum but pay into a pension. I am unmarried.
Thanks in advance.

csgohan4

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income


is a starting point

booksurr

which tax are you asking about?

CGT? you have not sold it yet and your LTV and mortgage are irrelevant

income tax? You have not provided the net rental profit so we cannot work it out

if all you want to know is will you remain a basic rate taxpayer and so the changes to mortgage interest rate relief will not impact you then again we cannot say as we do not know what your net taxable income is (after pension pmts and non finance rental costs) given you only have a £5k margin between gross salary and higher rate tax band yet the gross rental income is £6,300

havingaball74

booksurr wrote: »

which tax are you asking about?

CGT? you have not sold it yet and your LTV and mortgage are irrelevant

income tax? You have not provided the net rental profit so we cannot work it out

if all you want to know is will you remain a basic rate taxpayer and so the changes to mortgage interest rate relief will not impact you then again we cannot say as we do not know what your net taxable income is (after pension pmts and non finance rental costs) given you only have a £5k margin between gross salary and higher rate tax band yet the gross rental income is £6,300

I was thinking income tax. If the rent is £525, deduct £150 for mortgage, £50 for lettings fees, £25 for insurance, that leaves me with a net profit of £295 I believe. If that is taxed as a normal rate tax payer, how much income tax is that?

I earn net pay of £2200 per month after deductions (£300 pension per month). If my salary is £37000 and I pay approx £3500 per year into my pension and then add the £6300 that leaves me with £39600. Does that make any sense at all? Thanks.

havingaball74

Am trying to work out whether letting my house is worth it financially.

shaundiamonds

For a couple of grand a year, probably not but check with your accountant. New dividend laws will push your personal tax into another bracket that wont be pleasant. I'd stick the 50k in a fund.

booksurr

havingaball74 wrote: »

I was thinking income tax. If the rent is £525, deduct £150 for mortgage, £50 for lettings fees, £25 for insurance, that leaves me with a net profit of £295 I believe. If that is taxed as a normal rate tax payer, how much income tax is that?

you asked about the new rules yet it appears you don't understand them because that is how it was calculated under the old rules...

I will ignore the transitional arrangements for the next 3 years as you can look them up yourself.

havingaball74 wrote: »

I earn net pay of £2200 per month after deductions (£300 pension per month). If my salary is £37000 and I pay approx £3500 per year into my pension and then add the £6300 that leaves me with £39600. Does that make any sense at all? Thanks.

under the new rules....

gross income 37000 (you said 38k in your first post but hey ho!)
less pension 3500 (assuming that is the net amount deducted from your pay)
plus rental income 6,300
less non finance related rental costs (50+25) x12 = 900
less personal allowance 11,000

net taxable income 37,000-3500+6300-900-11,000 = 27,900
the higher rate threshold is 32,000 so on that taxable income you remain a basic rate taxpayer

tax payable 27,900x20%= 5,580
less mortgage interest relief (150x12) x 20% = 360
net tax payable = 5,220

under the new rules finance related rental costs are a tax REDUCER and are capped at the basic rate of 20%. They reduce the amount of tax you pay after you have calculated how much you owe. That is fundamentally different to the old rules where they were an eligible cost which reduced the size of your taxable income

havingaball74

Thanks so much Booksurr. Very useful. I appreciate you taking the time to answer. I suppose it is the new rules that confuse me. With the figures above, how much monthly tax would I pay? I am trying to work out if the new tax changes make it financially viable.

booksurr

havingaball74 wrote: »

I am trying to work out if the new tax changes make it financially viable.

you are a basic rate taxpayer. You will keep 80 pence out of every £1 you earn, so of course you are better off if you earn more.

Even if you cross into the higher rate bracket you will still be better off than not having a rental income at all. You would have to be paying £0,000s of mortgage interest and have a much larger rental income than you do before you would be anywhere near being in danger of it not being financially viable under the new rules

if you are asking would you get a better rate of return by investing the money into something else which is taxed in a different way then that is a question for a paid adviser to answer

havingaball74

Thank you. Do you think that £525 a month rental income (with a mortgage of £45,000) is a good rental yield?

havingaball74

booksurr wrote: »

you are a basic rate taxpayer. You will keep 80 pence out of every £1 you earn, so of course you are better off if you earn more.

Even if you cross into the higher rate bracket you will still be better off than not having a rental income at all. You would have to be paying £0,000s of mortgage interest and have a much larger rental income than you do before you would be anywhere near being in danger of it not being financially viable under the new rules

if you are asking would you get a better rate of return by investing the money into something else which is taxed in a different way then that is a question for a paid adviser to answer

If the rental income pushes you into the higher rate tax bracket, is there a way around this? Increased pension payments?