How to Reduce Tax on Rental Income

Start With the April 2027 Deadline

From 6 April 2027, rental profits carry their own income tax rates of 22%, 42% and 47%, two points above the current 20%, 40% and 45%, following Autumn Budget 2025. The mortgage interest credit moves to 22% at the same time. The parliamentary briefing on the property rates change puts the expected yield at around £500 million a year, so every legitimate way of trimming rental tax is worth two points more from next April, and the bigger moves take months to set up.

Claim Every Allowable Expense

Costs incurred wholly and exclusively for the letting come off profit before tax is calculated: agent and management fees, insurance, accountancy, ground rent and service charges, advertising for tenants, and repairs. The dividing line in the allowable expenses rules for landlords is between restoring something, which is deductible, and improving it, which is capital and only relieved against the gain on sale.

Replacing furniture, carpets, curtains and appliances in a furnished let qualifies for replacement of domestic items relief, but only like-for-like. The initial purchase of items for a new let gets nothing, an upgrade is restricted to the cost of an equivalent item, and anything you receive for the old item comes off the claim.

Use the Two Flat Allowances

The £1,000 property allowance means gross rents under £1,000 a year need not be declared at all. Above that, you can deduct £1,000 instead of actual expenses where your real costs are lower, but never both, and it cannot be combined with replacement of domestic items relief.

Rent-a-room relief shelters up to £7,500 a year from a furnished lodger in your own home, halved to £3,750 where the income is shared. It does not apply to a normal buy-to-let, but for Harrow homeowners with a spare room it is the simplest tax-free property income available.

Take the Full Section 24 Credit

Mortgage interest and arrangement fees no longer reduce rental profit. Instead the Section 24 basic rate credit knocks 20% of finance costs off the final bill, calculated on the lowest of finance costs, property profits, or adjusted total income above the personal allowance. Where the credit is capped in a low-profit year, the unused finance costs carry forward automatically, and plenty of landlords forget to bring them back in.

Split Income With a Lower-Earning Spouse

Married couples and civil partners are taxed 50/50 on jointly owned property by default. Holding as tenants in common in unequal shares, evidenced by a declaration of trust and reported on Form 17 within 60 days of signing, moves the income to the actual ownership split. Transfers between spouses are at no gain no loss for CGT, though SDLT can arise if mortgage debt moves with the share. Done before April 2027, this shifts income away from the new 42% property rate.

Manage Your Thresholds

The personal allowance and the £50,270 higher rate threshold are frozen until 2030-31, so rent increases alone push landlords into higher bands. Pension contributions and Gift Aid extend the basic rate band and reduce adjusted net income, which can pull rental profit back to basic rate and restore the personal allowance lost between £100,000 and £125,140. They do not reduce the rental profit itself, but they change the rate it suffers.

Use Losses Properly

A loss on your UK property business carries forward automatically against the first available future profits of the same business. It cannot be set against salary, and it dies if the property business ceases, so keeping one small let running can preserve a large carried-forward loss.

A Limited Company Is a Trade-Off, Not a Loophole

Companies deduct mortgage interest in full and pay corporation tax at 19% on profits up to £50,000 and 25% above £250,000. Against that, dividend tax rose in April 2026 to 10.75% at basic rate and 35.75% at higher rate, moving an existing property in triggers CGT and SDLT with the 5% surcharge at market value, and from April 2026 incorporation relief must be actively claimed on the return rather than applying automatically. The limited company versus personal ownership question turns on gearing, profit level and exit plans, and a review with an SPV property company specialist is worth doing before the 2027 rates land rather than after.

Avoid Packaged Schemes

Hybrid LLP structures, trust arrangements and other marketed schemes promising to make Section 24 disappear have a poor record under HMRC challenge, and several feature in HMRC spotlight notices. The independent guidance on property income from LITRG is a useful sense check: if a strategy only works because HMRC has not looked at it yet, it does not work.

Frequently Asked Questions

How much rent is tax free in the UK?

Gross property income up to £1,000 a year is covered by the property allowance and need not be declared. A furnished lodger in your own home is tax free up to £7,500 a year under rent-a-room relief.

Do I pay tax on rental income if I have a mortgage?

Yes. Tax is charged on rent minus allowable expenses, with mortgage interest excluded from those expenses. The interest instead earns a 20% credit against the final bill, rising to 22% from April 2027.

Can I split rental income with my spouse?

Yes, jointly owned property is taxed 50/50 by default, and a genuinely unequal split as tenants in common can be taxed in the real proportions once Form 17 and evidence of the beneficial ownership reach HMRC within 60 days of signing.

Is it worth putting rental property in a limited company?

Sometimes, mainly for higher rate taxpayers with significant mortgage interest who reinvest profits rather than drawing them. The entry costs of CGT and surcharged SDLT, plus the April 2026 requirement to claim incorporation relief, mean the sums need doing case by case.