So, you receive (or are about to start receiving) property income from renting out a room, but aren’t sure if you need to pay tax on this.
It’s a valid question! The rules around taxing property earnings can be confusing, but there are a few basic points which will help to simplify things (or at least make it a little less head-scratching).
In this article we’ll explain what might be classed property income, and what these earnings can mean for reporting and paying tax.
What is property income?
Quite simply, anything you earn from renting out land or buildings you own can be classed as property income. A common example of this would be the rental income you receive from a flat you’re letting out to someone.
There are a number of grey areas with this, though. For example, if you own an outbuilding and rent this out to someone, that’s property income. If you own an outbuilding and this is where you run your own hairdressing business, then the property is used for trade but it’s not generating income in its own right.
It’s a really important point because this can determine what sort of tax allowances you’re entitled to, and what types of taxes you’ll pay on it! We’ll come back to this.
What are the different types of property income?
There are lots of ways to earn money from property, so we’ll go over some of the main types to familiarise yourself with, plus others which are less apparent but still worth knowing about.
Rental income
Renting out property to tenants is probably one of the most common ways to earn property income, and there are all sorts of reasons why you might end up as a landlord.
For example, you might suddenly inherit a house that you don’t plan on moving in to yourself, or you might decide to move in with a partner (in which case you would need to either sell or rent out your current place).
If your tenants also pay you for things like cleaning in communal areas, the use of any furniture, or utilities, then HMRC classes this as rental income too.
Furnished holiday lets
Next up, this one is more of a short-term thing where you rent out property to holidaymakers or people travelling on business. This type of property once enjoyed special tax rules because it was seen as trade income rather than property income, but this isn’t an option anymore so FHLs are treated like any other type of rental property when it comes to working out tax.
Other property income
Again, there are other, less obvious types of property income – but these still count! Examples include:
- Letting out land
- Renting out a parking space
- Leasing mineral rights
What type of tax do I need to pay on my property income?
Generally speaking, income from property you rent out is taxable unless it falls within certain reliefs and allowances.
The most important one for you to remember is the property allowance, which is a lot like the trading allowance and basically allows you to earn up to £1,000 of tax-free income from property or land, without needing to declare it to HMRC.
Another important point is that if multiple people own a property together, they are each entitled to this allowance.
When do I need to tell HMRC about my property income?
A good rule of thumb is that if your income is over the property allowance, you need to let HMRC know. Essentially, you need to contact HMRC if your gross property income is between £1,000 and £2,500 and you don’t have any other untaxed income to report.
If your gross income from property is above £2,500, then you need to register for Self Assessment – but that doesn’t necessarily mean you’ll have to start paying tax. Whether you do or not really depends on how much you earn.
If you’d like to get more of an idea of how much tax you’ll pay, have a read through the UK tax rates, thresholds and allowances for the self-employed.
Careful and accurate bookkeeping will help you stay on top of your profits, and make it easier to predict your tax bill to avoid any nasty surprises!
Can I claim property allowance?
We mentioned it earlier, but you may still be wondering about the property allowance, which allows you to earn up to £1,000 of income from property or land, tax free. If your property income is below the threshold, you don’t even have to tell HMRC! If your property earnings are above the allowance, then you have two options.
You could claim the allowance against your income, or you could claim your expenses instead. You can only choose one, so choose the amount which gives you the biggest reduction on your tax bill!
Do I need a property accountant?
The quick and easy answer is not necessarily, and lots of people are happy taking care of everything themselves. That said, a property accountant is more likely to save you money in the long run, with in-depth knowledge and experience around tax allowances and relief. Check out our guide to property accountants to learn more.
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.
