How does Rental income Tax really works?

Theresonly1

I've seen many articles online explaining this but still can't get my head around it...

I currently own a one bedroom new build property (in immaculate condition) that I plan to rent it out for around £1800pcm. Many estate agents have told me I could achieve that monthly rental figure easily based on my area.

I'm currently on a £100,000 salary. I also understand that I would add up all my income for income tax so that includes £100000 work salary + £21600 (£1800pcm x 12) = £121600 total income. And for next tax year, that would be below the £125000 threshold that would mean I'm still within the higher tax rate band of <£125000.

So for paying my rental income tax is it just a case of:

doing a 40% of my £21600 and pay that via self assessment route (since my income tax for £100000 salary job would be automatically covered by PAYE and my tax would be deducted from my monthly pay from employers)?

RAS

What are the estate agents going to charge by way of fees? 

subjecttocontract

Presumably you'll have some expenses....letting agents, service charges, ground rents, utilities, insurance etc, etc.

saajan_12

Theresonly1 said:

I've seen many articles online explaining this but still can't get my head around it...

I currently own a one bedroom new build property (in immaculate condition) that I plan to rent it out for around £1800pcm. Many estate agents have told me I could achieve that monthly rental figure easily based on my area. - what other costs would you have eg agent commission, gas/elec/energy checks, deposit fees, repairs etc? Also what financing costs would you have (ie mortgage interest)?

I'm currently on a £100,000 salary. I also understand that I would add up all my income for income tax so that includes £100000 work salary + £21600 (£1800pcm x 12) = £121600 total income. And for next tax year, that would be below the £125000 threshold that would mean I'm still within the higher tax rate band of <£125000. - yes, but you do start losing your personal allowance, £1 for every £2 you earn over 100k. So on a £121,600 income, you'd lose 10,800 of your allowance, meaning you pay 20% tax on that piece as well, ie £2,160. You might need to top that up in your self assessment until it your tax code catches up. 

So for paying my rental income tax is it just a case of:

doing a 40% of my £21600 and pay that via self assessment route (since my income tax for £100000 salary job would be automatically covered by PAYE and my tax would be deducted from my monthly pay from employers)?- you fill in a self assessment for the total tax due on your total income, and then deduct the tax already taken via PAYE and pay the difference to HMRC. In practice this might be a little more than the 40% due to the lost personal allowance as above, and any other minor noise in the tax codes. For future years, you'll likely have a tax code change and HMRC may request that you mean partial payments in July / Jan to minimise the outstanding tax bill when you file your final tax return for a given year. 

Comments in line.. basically you need to also take repairs and voids into account which may reduce the total rental income. There's also tax relief at 20% only on any mortage interest (not the capital repayment part). The income above 100k also reduces your personal allowances, so you pay 20% tax on that part too. 

These calculations all feed through your self assessment, and you pay the residual tax that wasn't collected via PAYE in the Jan after the relevant tax year. This may trigger HMRC to adjust your tax codes and/or ask for partial payments in July / Jan for future years to minimise the final bill. 

AlexMac

Yeah, it’s that simple. Tell the taxman and they’ll let you set up an online HMRC tax return arrangement. 

Then, any time up to the January deadline the year AFTER the 5th April end of the tax year when you started letting the flat out, fill in an online self assessment form and press submit. Easy unless you’re into complex tax avoidance schemes with you main income - they ask about that and any other income such as interest on savings and investments. 

I’ve done it for 20-odd years and it doesn’t take long. You’ll find that your salary and tax paid is probably already pre - loaded into the form ( on the basis that my  occupational and state pensions are) which seems spooky; but then HMRC know where you live, lol!

Just keep a note of all your allowable expenses as these are offset against the income which they’ll ask you to declare in Full. Allowable stuff includes any Agent’s fees, freeholder Service Charges/buildings insurance, maintenance & repair, replacement of domestic items like washing machines if you provide ‘em, gas safety checks which you must do annually, admin and travel and any services you provide to the tenant. You only have to fill in half a dozen lines, and lower down in the form they ask you to declare interest on any mortgage or loan you used to buy the flat. Unlike the other expenses, that only attracts basic 20% relief. ( which is no problem for me as I don’t earn enough pension to put me into a higher tax band!) 

The final clever bit of the software immediately calculates any tax you owe!  And earlier, unless you end up owing gazillions, it offers you the option to tick a box to add it to next year’s tax code, although you can opt to pay it as a lump sum (which you might have to do over a certain threshold- I never reach that!)

simples!

theartfullodger

Where are you going to live?

propertyrental

theartfullodger said:

Where are you going to live?

You thinking of popping round to help the OP fill the form in artful?

Not sure it makes a difference whether OP lives in a 2nd (main) owned residence (with or without mortgage), rents elsewhere, or lives in parents' /partner's property. Tax would surely be the same in each case.

kingstreet

propertyrental said:

theartfullodger said:

Where are you going to live?

You thinking of popping round to help the OP fill the form in artful?

Not sure it makes a difference whether OP lives in a 2nd (main) owned residence (with or without mortgage), rents elsewhere, or lives in parents' /partner's property. Tax would surely be the same in each case.

If he's moving out of the UK the letting agent has to deduct it, IIRC.

_Penny_Dreadful

kingstreet said:

propertyrental said:

theartfullodger said:

Where are you going to live?

You thinking of popping round to help the OP fill the form in artful?

Not sure it makes a difference whether OP lives in a 2nd (main) owned residence (with or without mortgage), rents elsewhere, or lives in parents' /partner's property. Tax would surely be the same in each case.

If he's moving out of the UK the letting agent has to deduct it, IIRC.

Unless the OP signs up for HMRC’s non-resident landlord scheme. Assuming (s)he is moving overseas that is. 

propertyrental

kingstreet said:

propertyrental said:

theartfullodger said:

Where are you going to live?

You thinking of popping round to help the OP fill the form in artful?

Not sure it makes a difference whether OP lives in a 2nd (main) owned residence (with or without mortgage), rents elsewhere, or lives in parents' /partner's property. Tax would surely be the same in each case.

If he's moving out of the UK the letting agent has to deduct it, IIRC.

True, and OP may or may not be aware of that - but the Q was about the taxable income rather than how it's paid and by whom.