How rental profit is calculated
Individual landlords normally calculate profits from their UK property business by taking taxable rental receipts and deducting allowable revenue expenditure. A portfolio's UK rental profits and losses are generally brought together for this purpose, subject to the applicable rules.
Common revenue expenses may include qualifying repairs, landlord insurance, letting and management fees, certain service charges, utilities paid by the landlord and qualifying professional fees. Extensions and capital improvements are not normally ordinary revenue repairs. A mortgage capital repayment is not a deductible expense.
The £1,000 property income allowance may be relevant in smaller cases, but claiming it generally means that actual expenses cannot also be deducted. Different treatments can apply to rent-a-room situations and companies.
Mortgage interest: individuals and companies differ
For an individual letting residential property, qualifying mortgage interest and other residential finance costs are generally not deducted when calculating the taxable rental profit. Instead, relief is ordinarily given as a basic-rate tax reduction subject to statutory limits. This can produce a taxable profit much higher than the cash remaining after mortgage payments.
Companies are not subject to the same individual residential finance-cost restriction, although corporate interest deductibility and other corporate rules still need consideration. A company structure should therefore be compared across all taxes and costs, including money withdrawn by shareholders, rather than by looking at interest relief in isolation.
Income Tax thresholds for 2026/27
For an individual whose relevant Income Tax rates are those of England and Northern Ireland, the standard Personal Allowance is £12,570 for 2026/27, ordinarily reduced by £1 for each £2 of adjusted net income above £100,000. The basic rate is 20%, higher rate 40% and additional rate 45%, subject to taxable-income bands and the individual's circumstances.
A landlord with salary, pension or other income may use up some or all of the Personal Allowance and basic-rate band before rental profit is considered. Simply comparing a spouse's salary to rental receipts is not enough to determine the correct tax treatment.
The change from 6 April 2027
The Finance Act 2026 establishes separate property-income rates for 2027/28 of 22% (basic), 42% (higher) and 47% (additional) for England, Wales and Northern Ireland, with provisions for devolved rates. Qualifying residential finance-cost tax reductions are also expected to be calculated at the property basic rate of 22%.
The rates and statutory commencement should be rechecked when the transaction or return is prepared; this guide is dated October 2026 and cannot substitute for contemporary advice.
Records and reporting
Keep rental statements, invoices, mortgage-interest statements, purchase and improvement records, tenancy agreements and relevant tax documents. UK rental income may need to be declared through Self Assessment or other applicable reporting processes, and a landlord living abroad may fall within the Non-resident Landlords Scheme.
Before restructuring ownership to use a lower-earning partner's tax bands, establish who genuinely owns the beneficial interest and consider lender consent, SDLT, CGT and later IHT implications.