ARGH! Tax!

Disclaimer – view this article like a cosy chat with a friend over coffee- it’s not intended as financial advice rather, I’m simply sharing with you nuggets of information I’ve gleamed over the years. In the article I’ve included links to websites I’ve found helpful- I can’t claim any responsibility for the content of the links, but I’ve found them useful, so I help you do too!

When we made the leap from employment to self-employment and founding our own business, one of the scariest things was TAX. When you’re employed and paid via PAYE all you need to do is check that you’re payslip is correct and then move on with your life.

Alas, it’s not that simple when you’re responsible for your own Tax, but don’t worry, it’s also not as scary as it’s made out to be.

The basics

In the UK, every person can earn up to £12,570 before you have to pay tax. Anything above this amount you will need to pay Income Tax, either at Basic, Higher or Additional rate depending on how much you earn.

Band	Amount	Tax you have to pay
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^

Source: HMRC

You may also be able to claim a tax-free allowance for the first £1000 you earn from self-employment, and/or the first £1000 of income from a property you rent out.

If you’re married or in a civil partnerships then you may also be able to take advantage of the Marriage Allowance, click here for more information.

So, if you’re self-employed, the first £12,570 is tax free (whoop), after that, you pay 20% tax on everything you earn. On top of this you’ll need to factor in National Insurance contributions (which you do not want to miss paying) and possibly Student Loan repayments (if you had a student loan).

How does this apply to Landlords?

Case study:

You are a Basic Rate tax payer, a teacher employed full time earning £32,000 a year. You are paid via PAYE which covers payment of tax and National Insurance (and Student Loans if applicable). You rent out a house, here’s how to calculate the Tax:

Rental income: 1000 per month = £12000 per year.

Expenses:

Agency fees (8% per month)	£80 per month = £960 per year
Repairs (e.g. new tap + labour)	£300
Total	£1260

Taxable profit = Rental income – expenses:  £12000- £1260 = £10,740

So the amount you need to pay tax on is £10,740.

As you are a Basic Rate tax payer, this would total : £2148  

Remember, since Section 24, which came in in 2024, you cannot claim the interest on your mortgage payment as an expense meaning: your entire mortgage payment does not qualify as an ‘expense’. This can catch out many Landlords when it comes to calculating the yield on your rental property, so it’s good to be aware!

But what does the tax look like if you’re a Higher Rate payer?

Case study:

You are a Higher Rate tax payer, a teacher employed full time earning £60,000 a year. You are paid via PAYE which covers payment of tax and National Insurance (and Student Loans if applicable). You rent out a house, here’s how to calculate the Tax:

Rental income: 1000 per month = £12000 per year.

Expenses:

Agency fees (8% per month)	£80 per month = £960 per year
Repairs (e.g. new tap + labour)	£300
Total	£1260

Taxable profit = Rental income – expenses:  £12000- £1260 = £10,740

So the amount you need to pay tax on is £10,740.

You are a Higher Rate tax payer meaning that you need to pay 40% on every penny you earn over £50,270. In terms of your paid employment, your employer will take care of the calculations for that income, and you yourself will need to pay tax on your rental income at the higher rate:

40% of £10,740 = £4296 due in tax.

Tax returns: you’ll need to do one!

You will need to fill out a self-assessment form every financial year, even if your rental property runs at a loss. Personally, for the first few years of my Landlord journey, where I worked as a teacher and had my rental income as a side hustle, I completed my tax return myself. All I needed to hand was my payslips from my employment, and the record of income and expenses, and a few hours to work my way through the online form.

As the portfolio grew, I decided to use an accountant to complete the tax returns, it saved me time and worry, and made the Landlord journey much easier. There is no shame in seeking help and a good accountant is worth their weight in gold!

OK, but what if I’ve bought my house in a company structure?

So if this is you, then I’d certainly advise you to seek the guidance of an Accountant AND a Tax Advisor. The two are not the same, whilst an accountant can help you do the actual paperwork, the Tax Advisor will be able to assess your company structure and suggest the most tax-efficient ways to manage the money and other assets in the company.

I guess the main takeaway from this article is that tax is a certainty of life, you’ll need to factor it in into your financial planning, and it’s a great idea to seek support if you need it.