There are 2m limited companies actively trading in the UK, making up about 37% of the total business population (source: Federation of Small Businesses). Some have one company director, while others have more.
Company director income is often made up of a relatively small amount of wages paid through the company payroll, topped up with company share dividend payments, with both taxed accordingly. But what if you’re a company director with income from other sources, more specifically, from renting out property?
If you’re a company director who’s recently started renting out property or you’re considering it, you may be wondering how you report rental income, what expenses you can claim and how much tax you’ll pay. This guide provides a basic overview.
Here’s what we’ll cover
- Whether you need to register for Self Assessment.
- Paying tax on rental income when you’re a director.
- Rental income records you need to keep.
- What expenses you can claim.
Do you need to register for Self Assessment?
If you receive taxable income from renting out a property, you must declare those earnings by registering for Self-Assessment online and filing an SA100 tax return each year.
In the supplementary SA105 form, which you submit with the SA100, you detail your rental income and allowable costs/expenses for that tax year, so that your Income Tax and National Insurance liability can be calculated by HMRC. This is based on your net profit, accounting for your other income. HMRC will then send you a bill, which you pay directly.
You can, of course, rent out more than one property or jointly own a rental property, perhaps with a relative, partner, spouse or colleague, and you’ll be taxed according to your share of the net profits.
• HMRC has published guidance on filling out the SA105 form (PDF). You can also use it to declare furnished holiday lettings in the UK and European Economic Area.
When should you register for Self Assessment?
You can register as soon as you receive your first rent payment and HMRC recommends registering for Self Assessment as soon as possible.
However, you’re only required to register for Self Assessment by 5 October following the end of the tax year in which you received taxable rental payments. If you don’t, you risk having to pay a penalty.
Need to know! The deadline for online filing of your Self Assessment tax return is 31 January, following the end of the tax year on 5 April. Fines of £100 are payable if you’re late.
What rental income records should you keep?
You must maintain accurate financial records detailing all rent received, as well as any payments for additional maintenance or repairs your tenant pays you for, together with specific dates of when your property was occupied by a tenant.
You should also keep detailed records of costs incurred while managing and maintaining the rental property (see allowable expenses below). Recording your income and expenses/costs in accounting software is recommended, because it will save you a lot of time and effort when completing your Self Assessment tax return.
Also retain all receipts and invoices as proof of claimed expenses. There are apps you can get that automatically link to accounting software to update your total outgoings. HMRC can ask for proof of your expenses and go through your bank statements. Records must be kept for six years and you can be fined if your records are inaccurate, incomplete or lost.
Need to know! Keep a log of mileage you drive wholly and exclusively as a result of renting out your property (eg if you need to visit the property), as fuel and vehicle costs can be claimed as an allowable expense.
What allowable expenses can you claim?
Costs must be “wholly and exclusively” the result of renting out your property if they’re to qualify as allowable expenses. You can’t claim for company or personal expenses.
Allowable expenses include:
- property maintenance and repairs (eg replacing a broken window)
- redecorating between tenancies
- insurance (eg building, contents and public liability)
- gardening and cleaning services
- letting agent fees/management fees
- legal fees for lets of a year or less
- accountancy fees
- direct costs (eg phone calls, stationery and advertising for new tenants)
- fuel/vehicle costs (only the proportion used for your rental business).
Replacing domestic items such as baths, washbasins and toilets is allowable, because they’re classed as building repairs, but only if you replace like for like (ie the quality must not be superior).
Similarly, if your rental property is furnished or part-furnished, you may be able to claim for replacing worn, damaged or defective sofas, beds, carpets, curtains, fridges, washing machines, sofas, crockery, cutlery, etc, as long as the quality is of comparable value, not superior.
Landlords used to be able to deduct mortgage interest and other finance costs (eg mortgage arrangement fees) from their rental income to reduce their tax liability. But now you get a tax credit of 20% instead.
Need to know! You can’t claim allowable expenses for property improvements such as building an extension, but you may be able to subtract these costs to reduce your capital gains tax bill if you sell your rental property.
How much tax will you pay?
The standard tax-free Personal Allowance is £12,570 (2021/22 tax year) if you earn less than £100,000 a year. The Income Tax rates are different in Scotland, but in England and Wales:
- If you earn between £12,571 and £50,270 a year, you will pay 20% Income Tax (Basic Rate) on your taxable income.
- If you earn between £50,271 and £150,000 a year, you will pay 40% (Higher Rate) on your taxable income.
- If you earn more than £150,000 a year, you will pay 45% Income Tax (Additional Rate) on your taxable income.
The wages you earn from your company via its payroll will be added to your rental income to determine your overall Income Tax liability.
If you rent out more than one property and or buy new properties to rent out, HMRC will consider it to be running a property rental business and you’ll need to pay Class 2 National Insurance contributions if your profits are £6,515 a year or more.
When you’re new to renting out property, no matter how much experience you have of running a company, it’s advisable to seek tailored tax advice from an expert. It could really help to maximise your rewards and take away the pain of having to complete tax returns.
About GoSimpleTax
Our software submits directly to HMRC and is the digital solution for Landlords to record income, expenses and file their self-assessment giving hints on savings along the way.
Covering all self-assessment pages, not just property, GoSimpleTax does all the calculations for you saving you ££’s on accountancy fees.
Available on desktop or mobile application.