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Accounting for Landlords UK: What You Need to Know

Whether you rent out a single buy-to-let property or manage a growing portfolio, getting your accounting right is not optional — it directly affects how much tax you pay and whether you stay on the right side of HMRC. This guide covers everything UK landlords need to know: how rental income is taxed, which expenses you can deduct, what records to keep, and what is changing with Making Tax Digital. It is aimed at both new and experienced landlords renting out residential or commercial property in the UK.

How rental income is taxed

Rental income is treated as a separate source of income for UK tax purposes. You add it to any other income you earn — from employment, self-employment, dividends, or pensions — and the total determines which tax bands apply to you.

In 2026/27, the tax rates are:

  • Personal Allowance: £12,570 (no tax on income up to this amount)
  • Basic rate: 20% on income between £12,570 and £50,270
  • Higher rate: 40% on income between £50,270 and £125,140
  • Additional rate: 45% on income above £125,140

If you have a full-time job and earn £40,000 in employment income, even a relatively modest rental profit could push you into the 40% higher rate band. This is why it is worth understanding exactly what profit you are being taxed on — not just your gross rent received.

Rental profit is calculated as: Gross rental income minus allowable expenses. You are not taxed on turnover. You are taxed on the net profit after legitimate deductions.

Allowable expenses for landlords

HMRC allows you to deduct expenses that are incurred wholly and exclusively for the purposes of letting the property. The most common allowable expenses include:

  • Letting agent fees and management charges
  • Buildings and contents insurance
  • Repairs and maintenance (not improvements — see below)
  • Ground rent and service charges
  • Accountancy fees
  • Legal fees for tenancy agreements (not purchase costs)
  • Council tax, water rates, and utility bills (only when you pay these as the landlord)
  • Advertising costs to find tenants
  • Furniture replacement under the replacement of domestic items relief

Repairs vs improvements

This is a common area of confusion. A repair restores an asset to its original condition — for example, fixing a broken boiler or patching a damaged roof. Repairs are fully deductible in the year you incur them.

An improvement enhances the property beyond its original state — for example, converting a loft into a bedroom or fitting a new extension. Improvements are capital expenditure. They are not deductible as expenses, but they can reduce your capital gains tax bill when you eventually sell the property.

If you are ever unsure whether a cost is a repair or an improvement, it is worth speaking to an accountant before you file your return. Incorrectly claiming capital costs as revenue expenses is one of the most frequent errors HMRC picks up on landlord tax returns.

Mortgage interest relief: what changed

Before April 2020, residential landlords could deduct mortgage interest directly from their rental income, reducing their taxable profit. That has now changed entirely.

Under the current rules, residential landlords receive a tax credit equal to 20% of their finance costs — the basic rate — rather than a full deduction. This means higher and additional rate taxpayers can no longer offset the full cost of mortgage interest against their rental profits.

In practice, this rule change significantly increased the tax bill for many landlords who borrow to fund their portfolios, particularly those in the higher rate band. The calculation now works like this:

  1. Calculate your rental profit without deducting mortgage interest
  2. Pay income tax on that profit at your marginal rate
  3. Then receive a 20% tax credit based on your finance costs

Note that this restriction applies to residential property only. Commercial property landlords can still deduct finance costs in the traditional way.

This change is one of the main reasons many landlords have explored moving their property portfolios into a limited company structure.

Record keeping and bookkeeping

Good records are the foundation of accurate tax returns. HMRC expects you to keep records for at least five years after the 31 January self assessment deadline for the relevant tax year.

At a minimum, you should keep records of:

  • All rent received, including the dates and amounts
  • Every expense you incur, with receipts or invoices
  • Bank statements for any account used for property income or expenses
  • Mortgage statements showing the interest element
  • Any correspondence with letting agents
  • Details of the replacement of domestic items you claim relief on

Using accounting software makes this considerably easier. Xero, for example, lets you reconcile bank transactions, attach digital receipts, and run reports by property. If you would like help setting it up, we offer Xero training tailored to landlords and property investors.

Alternatively, if you would rather hand this to someone else entirely, our bookkeeping service handles the day-to-day recording of income and expenses so your figures are always accurate and ready for your tax return.

Self assessment for landlords

If your rental income exceeds £1,000 in a tax year, you must register for self assessment and complete a tax return. The £1,000 threshold refers to gross rental income, not profit. Even if your expenses wipe out your profit entirely, you still need to register if you earn more than £1,000 in gross rent.

You must also complete a self assessment return if your rental income causes your total income to exceed £100,000, or if you have a tax liability that cannot be collected through your PAYE code.

Key self assessment deadlines for landlords

  • 5 October — deadline to register for self assessment if it is your first time
  • 31 October — paper tax return deadline
  • 31 January — online tax return deadline and payment deadline for any tax owed
  • 31 July — payment on account deadline (if applicable)

Missing the 31 January deadline triggers an automatic £100 penalty, with further penalties accruing the longer the return is outstanding. Tax owed after 31 January also attracts interest.

Limited company vs personal ownership

One of the most common questions we hear from landlords is whether they should hold property personally or through a limited company. There is no single right answer — it depends on your circumstances.

Advantages of a limited company

  • Mortgage interest is fully deductible as a business expense within a company, unlike the restricted relief for individual landlords
  • Profits retained in the company are subject to corporation tax at 19% (for profits under £50,000 in 2026/27), which is lower than the higher or additional rate of income tax
  • You can control when and how you extract profits, which gives you more flexibility over your personal tax position

Disadvantages of a limited company

  • Transferring existing personally owned properties into a company typically triggers both capital gains tax and stamp duty land tax — this can make it prohibitively expensive for existing landlords
  • Mortgage products for limited companies are generally fewer and more expensive than personal buy-to-let mortgages
  • Running a company comes with additional compliance obligations: filing annual accounts with Companies House, corporation tax returns, and potentially payroll if you take a salary
  • Extracting money from the company as dividends is taxed, with the dividend allowance reduced to just £500 in 2026/27

The limited company route tends to make more sense for landlords who are building a portfolio from scratch, who pay higher rate income tax, and who intend to reinvest profits into further properties rather than extracting all the money as income. If you are a basic rate taxpayer with one or two properties, the additional complexity may not be worth it.

Making Tax Digital for landlords

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a significant change to how landlords report income to HMRC. From April 2026, landlords with gross property income over £50,000 must use MTD-compatible software to keep digital records and submit quarterly updates to HMRC, rather than a single annual tax return.

The quarterly submissions are not quarterly tax returns — you are not paying tax four times a year. You are submitting income and expense data to HMRC four times a year, with a final end-of-year declaration that confirms your total position. Tax is still paid by 31 January.

If your gross rental income is between £30,000 and £50,000, the requirement is currently expected to apply from April 2027. Check the latest HMRC guidance for updates on the lower threshold, as these dates can change.

You will need software that is approved for MTD. Xero is one of the most widely used options. If you need help getting set up, our Making Tax Digital service covers everything from software selection to quarterly submissions.

Capital gains tax when you sell

When you sell a rental property and make a gain, capital gains tax (CGT) is due on the profit. In 2026/27, the CGT annual exempt amount is £3,000 — down sharply from earlier years. Any gain above this is taxable.

The CGT rates on residential property are higher than those on most other assets — check the latest HMRC guidance for the current residential property CGT rates, as these have been subject to change at recent Budgets.

When calculating your gain, you can deduct:

  • The original purchase price
  • Stamp duty paid on purchase
  • Legal and estate agent fees on purchase and sale
  • Capital improvements made during ownership (not repairs)

If the property was ever your main home, you may be entitled to private residence relief for the period you lived there, which can reduce the taxable gain significantly.

One important point: when you sell a residential property and CGT is due, you must report the gain and pay any tax owed within 60 days of completion. This is a separate process from your annual self assessment return, and missing the deadline results in penalties and interest.

VAT and landlords

In most cases, residential rental income is exempt from VAT. You do not charge VAT on rent, and you cannot reclaim VAT on related costs. This means VAT registration is generally not relevant for residential landlords.

Commercial property is different. The letting of commercial premises is usually VAT-exempt by default, but landlords can elect to waive that exemption — known as “opting to tax” — which means they then charge VAT on the rent and can recover VAT on costs such as refurbishment works. This can be beneficial in some circumstances, but it also means tenants who are not VAT-registered face an additional cost.

If you have a mixed portfolio or are unsure whether VAT applies to your situation, speak to an accountant. Getting this wrong can be expensive. Our team handles VAT returns for property businesses where a VAT obligation does apply.

Getting your property accounting in order

Rental income is one of the most scrutinised areas of HMRC’s compliance activity. With changes to mortgage interest relief, a reduced CGT allowance, and Making Tax Digital approaching, landlords face more accounting complexity than they did a decade ago. The good news is that with the right records, the right software, and professional support where you need it, there is nothing here that cannot be managed efficiently. If you would like help with your rental property accounts or tax return, our specialist team works with landlords across the UK — get in touch to find out how we can help.

Frequently asked questions

Do I need to complete a self assessment tax return as a landlord?

Yes, if your gross rental income exceeds £1,000 in a tax year, you must register for self assessment and file a tax return. This applies even if your allowable expenses mean you have made no profit.

Can I deduct all of my mortgage interest from my rental income?

Not if you own residential property personally. Individual residential landlords receive a 20% tax credit on finance costs rather than a full deduction. This means higher rate taxpayers cannot offset their full mortgage interest against their rental profits. The restriction does not apply to commercial property or to properties held within a limited company.

What expenses can a landlord claim against rental income?

You can claim expenses that are wholly and exclusively for the purpose of letting, including letting agent fees, insurance, repairs and maintenance, accountancy fees, and the replacement of domestic items. You cannot claim capital improvements, personal expenses, or the cost of your own labour.

Do landlords need to register for VAT?

Residential rental income is exempt from VAT, so most residential landlords do not need to register. Commercial landlords may be able to opt to tax, but this is a specific election with its own implications. If you are unsure, speak to an accountant before making any election.

Should I put my rental properties in a limited company?

It depends on your circumstances. A limited company can be tax-efficient for higher rate taxpayers building a portfolio, as corporation tax rates are lower than income tax rates and mortgage interest is fully deductible. However, transferring existing personally owned properties into a company usually triggers capital gains tax and stamp duty, which makes it unsuitable for most existing landlords without careful planning.

When does Making Tax Digital apply to landlords?

From April 2026, landlords with gross property income over £50,000 must use MTD-compatible software and submit quarterly digital updates to HMRC. The requirement is expected to extend to those with income over £30,000 from April 2027. Check the latest HMRC guidance for confirmed dates.