If you’ve recently started earning income from a rental property that you own, you may need to submit a self-assessment tax return to HMRC at the end of the tax year. It’s normal to need some additional guidance the first time you file a tax return as a landlord, even if you have been self-employed in the past.

The sooner you start thinking about your self-assessment, the better, as this will provide you with ample time to compile your financial records, make calculations and consult with an accountant. This guide will help you to file your tax return more efficiently while reducing your risk of making errors and incurring fines.

Start with the Right Software

Accounting software is the foundation of a smooth self-assessment process for landlords. Not only will it allow you to better organise your finances, but it will ensure you remain compliant with tax regulations and improve the efficiency of your accounting processes.

Recently, Making Tax Digital (MTD) has changed the way many businesses file their VAT tax return. The new policy means that businesses with an annual turnover of more than £85,000 must file their tax return using accredited tax software.

While most landlords don’t need to pay VAT, MTD will soon impact everyone submitting a self-assessment. From April 2024, landlords will need to follow these new guidelines and file their tax returns online if their rental income is over £10,000 a year.

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Switching to making tax digital software for landlords sooner rather than later will make your transition to this new system much easier. If you currently use spreadsheets or some other method of organising your finances, most accounting software providers will allow you to import historic information so that all your records are in the same place.

Tax on Rental Income

Landlords need to pay tax on the profit they make on a rental property. This means that your taxable income will be all the rental income you receive minus any allowances and expenses.

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Rental income typically refers to rent payments from tenants, but it may also include income from additional services you provide such as cleaning communal spaces or utilities. Of course, the cost of providing cleaning services and utilities can later be deducted from your total profit as expenses.

Similarly, if you do not refund a tenant’s deposit due to damages, the deposit will be counted as part of your rental income. For this reason, it’s important to keep careful records of any money you spend on maintaining your property so that it can be expensed later.

Rental Income and Your Self-Assessment

The first £1000 of rental income you earn is classed as a property allowance, which means it’s tax-free. Landlords earning either over £10,000 of rental income before expenses, or between £2,500 to £9,999 after expenses are required to submit a self-assessment tax return.

If your income is somewhere between £1000 and £2,500, you will need to contact HMRC, as sometimes they will arrange for you to pay tax through PAYE. There’s no need to separate your total rental income if it is earned from multiple properties, as it should all be submitted on the same tax return.

Remember, when calculating how much tax you owe, you do need to take into account any other income you earn, whether through self-employment or other sources. This is to help you determine your tax band. Depending on your total income and the thresholds you exceed, you may need to pay 20%, 40% or 45% tax.

Rental Income or Trading Income?

Some landlords will also receive what’s known as trading income on top of their rental income, depending on the type of services they offer to their tenants. Income from services such as cleaning private rooms, preparing and cooking food or doing laundry is usually classed as trading income and will be considered and taxed separately from your rental income. These services cannot be classed as expenses and taken off your rental profit.

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If you decide to turn one or more of the properties you let out into a B&B, hotel or guesthouse, your rental income will become trading income. In this case, you will have to complete your self-assessment as someone who is self-employed or runs a business. If you also let out furnished rooms in your own home, then you may be able to apply for tax relief via the rent-a-room scheme. This would allow you to earn £7,500 per year tax-free from lodgers in your home.

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Preparing and Registering for Your Self-Assessment

Before filing your self-assessment tax return, you must first register online. The deadline for the 2021/22 tax year is 5th October 2022 and failing to register by this date may result in fines. Once your registration is complete, you should expect to receive a Government Gateway ID, which will enable you to create and manage your personal tax account.

To prepare for your self-assessment, you must gather the following information:

  • Dates when your property was let out to tenants
  • The total amount of rent you were paid
  • Your total expenses, which may include credit and debit card payments, cheques and cash
  • Unique Taxpayer Reference (UTR) Number

If you’re using accounting software, it will be much easier to access this information. However, it’s important to also find any relevant contracts, invoices, receipts, bank statements and documents that may not have been logged in your online system. If you still have a mortgage on your rental property, you may also be able to claim the interest on that as an expense, so make sure you have copies of your mortgage statement as well.

The deadline for online self-assessment tax returns is midnight on 31st January 2023. However, if you choose to submit a paper return, you will need to submit it by midnight on 31st October 2022. Missing these deadlines without a reasonable excuse as to why will result in penalties. In some circumstances, you may be able to pay the tax you owe in instalments throughout the year. You will still have to submit your tax return online, but HMRC may set up a payment plan to lessen the impact your taxes will have on your financial situation.