Posted: 22. October 2019 by: Rupert Tennant

How is Renting a Room Taxed?

Renting a property is one of the most common ways to earn extra income. This has become even more obvious now when there are apps to facilitate the process and make it easier. If you’re renting a property, you should take the time to consider the tax implications of it.

This often comes as a surprise to the small business owners that do it, and it’s best to consult tax experts to help you prepare for the tax season when it comes around at the end of the year.

What taxes?

The first thing to consider is what kind of taxes you’ll pay since that’s what determines how much you pay and how. There are 3 main types of taxes in the UK: VAT, income tax, and national insurance. As a landlord, you’ll pay the last two on the income made from renting.

There are also local taxes paid for owning the property at a particular city or at a particular part of the city, and that’s called a council tax since it’s set up by the local council. That’s also something you need to pay as a landlord.

What’s income?

The tax is paid on the income that you make from renting, so the question remains, what is income in this context. It’s not as easy to figure since there are a few types of payments that you need to get, but not all of them are for you alone.

The income in this case includes:

  • Rent money paid by tenants
  • Utility costs
  • Fees for the use of communal space
  • Parking fees
  • Fees for the use of furniture

This is all to say that you need to pay for more money than you actually got as income.

Allowable expenses

There are expenses that a business needs to make in order to be functional and to operate in the first place. It’s these that are deducted from your taxes to make the company set up easier. A landlord also has such expenses, and therefore it’s treated as a small company. These are the expenses that you can deduct:

  • Insurance
  • Property maintenance
  • Water rates and other utilities
  • Interest on the mortgage for purchasing the property.
  • Letting agents and managers
  • Accounting fees
  • Legal fees
  • Wages of hired help
  • Some household costs, such as phone bills
  • Vehicle running costs

When to report?

The income tax that you need to pay on this is paid via a self-assessment tax return, and that’s the income you need to report yourself. This is done once a year, and the payments can be made in 4 equal instalments.  The report needs to be made on time as well as the payments, or there are fees for being late.

The tax year lasts from 5th of April to 5th of April, and that’s also the time to pay the last instalment for the previous year and to report the taxes for the next one at the same time.

Buy to let

Buy to let is the name for the tax relief that’s made to help those who purchase a property in order to let it and use it as an income source. The rules for this tax relief have been changed in recent years, meaning in 2017 for the last time.

The change has come in terms of who can apply for a buy to let scheme. It used to be a scheme that everyone can apply for, and it’s not any more since you can’t apply for it if you’re a high rate taxpayer.

Selling your property


When you sell the property, there are additional tax rules that apply that aren’t connected to how the property is being used or is it a personal property as such or just a source of income for you. The allowance for selling a property is rather high, and it’s especially so if it’s the only property you own.

The rate for selling a property is also very high, but that’s only on the amounts that are higher than the allowance, and for most homeowners, it won’t be an issue regardless of the high rate. It’s paid when the sale is made.

Conclusion

Renting a room is a common source of income, and as income, it gets taxed on a yearly basis. Income tax rules apply to this as it would be for income coming from a salary or from selling some other item. That also means that you get the same allowances as the same fees.

At the same time, there are additional tax reliefs for landlords, since renting a property is treated as a business and those who make purchases to improve the property they are renting get a tax deduction for it.  It’s best to consult an accountant at some point.