Tax is where a profitable rental can quietly turn into a loss-making one. Since the Section 24 mortgage-interest changes, many higher-rate landlords pay far more tax than they expect, and Making Tax Digital (MTD) for Income Tax is now live, changing how landlords report. This guide explains how rental income is taxed in the 2025/26 tax year, what you can deduct, the headline rates, and what MTD means for you right now — with a worked example.
England, Wales and Northern Ireland use the same income tax bands; Scottish taxpayers have different bands and should check Scottish rates.
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How rental income is taxed
If you own property personally (not through a company), your rental profit is added to your other income and taxed at your marginal Income Tax rate.
2025/26 Income Tax bands (England, Wales & NI):
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The Personal Allowance tapers away by £1 for every £2 of income over £100,000.
There is also a £1,000 property allowance — if your total rental income is £1,000 or less, you usually don't need to declare it. Above that, you can either deduct actual expenses or claim the £1,000 allowance, not both.
Section 24: the mortgage-interest restriction
This is the single most important rule for mortgaged landlords. Since April 2020, individual landlords can no longer deduct mortgage interest (and other finance costs) as an expense. Instead:
- You calculate your rental profit without subtracting finance costs.
- You then receive a basic-rate (20%) tax credit on your finance costs.
Why it matters: for a basic-rate taxpayer the effect is broadly neutral. But for higher- and additional-rate taxpayers it is not — your profit is inflated by the full rent before interest, which can push you into a higher band and means your relief (20%) is worth far less than the tax you pay (40%/45%). In heavily geared cases the effective tax rate on rental profit can be very high.
Section 24 does not apply to properties held in a limited company, where mortgage interest remains a fully deductible business expense — one reason many landlords consider incorporating (see below).
Allowable expenses
You can deduct costs that are wholly and exclusively for the rental business, including:
- Letting agent and management fees
- Repairs and maintenance (but not improvements — those are capital)
- Buildings and contents insurance
- Ground rent, service charges
- Council tax, utilities and broadband (where you pay them)
- Accountancy fees
- Direct costs of letting (advertising, referencing, phone calls)
- Replacement of domestic items (the "replacement of domestic items relief" — like-for-like replacements of furniture, white goods, etc.; the initial purchase isn't deductible)
Not deductible as expenses: mortgage interest (restricted — see Section 24), capital improvements, and your own time. Keep every receipt.
Get tax-year ready without the spreadsheet sprawl
Lettfolio pulls your rent, expenses and finance costs together by tax year, so your figures are ready when it's time to file — no last-minute receipt hunt.
Start freeMaking Tax Digital for Income Tax (MTD for ITSA)
This is the big change, and it is already here. MTD replaces the annual Self Assessment return with digital record-keeping and quarterly submissions to HMRC using compatible software, plus a final declaration. It is phased in by qualifying income (gross self-employment + property income, before expenses):
| From | Mandatory if qualifying income is over |
|---|---|
| 6 April 2026 | £50,000 |
| 6 April 2027 | £30,000 |
| 6 April 2028 | £20,000 |
MTD for Income Tax went live on 6 April 2026. If you're in scope you make four quarterly updates plus one final declaration each year — five submissions instead of one. If your gross rental (plus any self-employment) income is over £50,000 you're already mandated: quarterly updates are due by 7 Aug, 7 Nov, 7 Feb and 7 May, so you need compatible digital records in place now.
Capital Gains Tax (CGT) when you sell
When you sell a rental property at a profit, you pay CGT on the gain (sale price minus purchase price, allowable costs and improvements).
2025/26 residential property CGT rates:
- 18% on gains within your basic-rate band
- 24% on gains in the higher/additional-rate band
The annual exempt amount is £3,000 per person (frozen). A jointly owned property gives two allowances. CGT on a UK residential property disposal must be reported and paid within 60 days of completion.
Should you incorporate? The trade-offs
Holding property in a limited company avoids Section 24 (full interest relief) and pays Corporation Tax on profit rather than Income Tax. But it isn't automatically better:
Potential benefits: full mortgage-interest deductibility; lower headline tax on retained profit; easier to build a portfolio and pass on shares.
Potential downsides: company buy-to-let mortgages are often more expensive; transferring existing personal properties into a company is a sale that can trigger CGT and a 5% SDLT surcharge; extracting profit as dividends is taxed again; extra admin and accountancy costs.
Incorporation suits some portfolios and not others — take professional advice on your specific numbers before restructuring.
A note on Stamp Duty (SDLT) when you buy
Buying an additional residential property in England/NI attracts the standard SDLT rates plus a 5% surcharge on every band (the surcharge rose from 3% to 5% on 31 October 2024). Standard bands from 1 April 2025: 0% to £125,000, 2% to £250,000, 5% to £925,000, 10% to £1.5m, 12% above. Add 5% at each band for a buy-to-let. Budget for this up front.
Worked example (illustrative)
Sarah is a higher-rate taxpayer. Her flat earns £15,000 rent a year. Allowable expenses (excluding mortgage interest) are £3,000. Mortgage interest is £6,000.
| Step | Calculation | Result |
|---|---|---|
| Taxable rental profit | £15,000 − £3,000 (interest is NOT deducted) | £12,000 |
| Tax at 40% | 40% × £12,000 | £4,800 |
| Section 24 credit | 20% × £6,000 interest | £1,200 |
| Tax due | £4,800 − £1,200 | £3,600 |
Under the pre-2020 rules she would have deducted the £6,000 interest first (profit £6,000) and paid 40% = £2,400. Section 24 costs her an extra £1,200. This is illustrative only — your figures will differ.
5 key takeaways
- Rental profit is taxed at your marginal rate (20/40/45%) and stacks on top of your other income.
- Section 24 hits higher-rate landlords hardest — you no longer deduct mortgage interest, only get a 20% credit.
- MTD for Income Tax is live now for those with over £50,000 income — quarterly updates are due 7 Aug, 7 Nov, 7 Feb and 7 May, so keep digital records today.
- CGT on residential property is 18%/24% with a £3,000 allowance, reportable and payable within 60 days.
- Incorporation can solve Section 24 but creates new costs — never restructure without crunching your own numbers with an accountant.
Lettfolio tracks rent, expenses and finance costs across your whole portfolio in one place, so your records are digital and tax-year-ready for your accountant or MTD-compatible filing software. Start free at lettfolio.uk.
Sources
- GOV.UK — Income Tax rates and Personal Allowance
- GOV.UK — Tax relief for residential landlords (Section 24)
- GOV.UK — Paying tax on rental income (allowable expenses and property income)
- GOV.UK — Making Tax Digital for Income Tax
- GOV.UK — Capital Gains Tax when you sell property (60-day reporting)
- GOV.UK — Stamp Duty Land Tax residential and higher rates
- Low Incomes Tax Reform Group — MTD for Income Tax start dates
Facts verified June 2026 for the 2025/26 tax year. Rates and thresholds can change at Budgets and fiscal events.
Related guides
- The new landlord starter guide — set up your first buy-to-let, tenancy and tax records the right way.
- The Renters' Rights Act 2025: a landlord's guide — the tenancy law changes every UK landlord must follow.