Tax planning for rental income is not about aggressive schemes – it’s about knowing the rules, claiming what you’re entitled to and organising your affairs so you do not pay more tax than you need to. HMRC’s latest release shows 2.84 million individuals reported property income in 2022/23, declaring £50.17 billion between them, so getting this right really matters (HMRC, 2024)
In this article, we explain how rental income is taxed in the UK for 2025/26, highlight the key reliefs and allowances you should be using, and flag common planning steps – from ownership structure to the timing of repairs – that can legitimately reduce your bill. We also cover practical steps on record keeping and the approaching Making Tax Digital (MTD) deadlines, plus when it’s worth getting professional advice. If you’d like tailored guidance, our property tax specialists at Thompson Wright are here to help.
Tax planning for rental income: The building blocks
Know what is (and is not) taxable
If you personally own the property, the first £1,000 of gross rental income each year can be covered by the property allowance. If you use this allowance you cannot also deduct actual expenses for that income, so you should compare which route gives the lower bill. (HMRC, property allowance).
Above that, your net profit (rents less allowable expenses) is taxed at your marginal Income Tax rate. The standard personal allowance remains £12,570 and the higher rate threshold is still £50,270 for 2025/26, so more landlords are being dragged into higher rates because those thresholds are frozen.
Section 24 still bites – plan for it
Individuals cannot deduct residential mortgage interest from rental income. Instead, you receive a 20% tax credit on your finance costs. For basic rate taxpayers, this is broadly neutral, but for higher and additional rate taxpayers, it increases the effective tax paid and can even push you into a higher band. Build this into your forecasts and consider whether restructuring (see below) could help.
Allowable expenses you should not miss
Common deductible costs include:
- Repairs and maintenance (but not capital improvements – see timing below)
- Letting and management fees
- Accountancy fees for preparing rental accounts
- Insurance premiums
- Council tax, utilities and service charges that you pay
- Replacement of domestic items: when you replace like‑for‑like furnishings and appliances in an unfurnished or part‑furnished let, the cost is allowable, but the original purchase is not
Good records are essential to support these claims.
Choose the right ownership structure
Whether to hold property personally or through a company is a tax and commercial question. Broad principles:
Personal ownership: Simple and low-cost to run. You’re taxed on profits at Income Tax rates and restricted to the 20% credit on mortgage interest. You can use your Personal Allowance, basic rate band and property allowance. Transferring a share to a spouse or civil partner can help balance income across bands and make better use of two sets of allowances (watch for mortgage lender consent and potential stamp duty/CGT issues).
Company ownership: The company pays corporation tax on profits, and (unlike individuals) it can generally deduct full finance costs. However, taking money out as salary or dividends triggers further tax. Set-up and admin costs are higher, and moving existing personally held property into a company can create stamp duty land tax and capital gains tax charges. This route often works best for long‑term, geared portfolios where profits will be retained for reinvestment.
Partnerships/LLPs: Used less often now, but can assist with profit sharing between spouses and with future succession planning. The tax position is transparent – profits are taxed on the partners.
If you’re unsure which structure suits your plans, speak to us. Learn more about our tax planning services.
Timing repairs and improvements
The distinction between a repair (deductible) and an improvement (capital, not immediately deductible) still matters. Practical points:
- Plan large repair programmes for a year when you expect higher rents or fewer other deductions – that way, the relief shelters income that would otherwise be taxed at 40% or 45%.
- If you replace part of an asset (for example, a few roof tiles or a single window like‑for‑like), it’s usually a repair. A full new extension, or upgrading single glazing to high‑spec triple glazing, is likely to be capital.
- Keep invoices and notes explaining the nature of the work – HMRC often challenges this area.
Don’t forget the exit: CGT still bites
If you sell a rental property, your gain above the annual exemption is chargeable to capital gains tax. From 6 April 2025 the rates on residential property remain 18% for gains falling in your basic rate band and 24% for gains above it. Planning tools include crystallising losses elsewhere, spreading sales over tax years, using your spouse’s annual exemption and basic rate band, and considering holdover relief where gifts to certain trusts are appropriate.
Record keeping and Making Tax Digital
Digital records are no longer optional. HMRC has confirmed that from 6 April 2026, landlords (and sole traders) with qualifying income over £50,000 must comply with Making Tax Digital for Income Tax (MTD ITSA). Those with income over £30,000 join from April 2027, and the government plans to bring in £20,000 from April 2028. You’ll need to keep digital records and send quarterly updates, with an end‑of‑period statement after the year end. (HMRC, 22 April 2025).
Practical steps now:
- Move to cloud accounting software with a dedicated property module – we can help you set this up and integrate bank feeds. See how we support digital accounting.
- Create a simple digital “evidence” folder for invoices, interest statements and letting agent reports.
- Run quarterly reviews: Are you on track for your tax payments on account? Should you bring forward repairs or delay them? Are you approaching a higher rate threshold? Quarterly reviews: act early, not at the return deadline.
Furnished holiday lettings: Special rules gone
If you previously relied on the Furnished Holiday Lettings (FHL) regime, be aware it was abolished from April 2025. Reliefs such as full mortgage interest deduction, capital allowances and certain CGT benefits no longer apply, so you should revisit your forecasts and consider whether a company route or a change of use still works
How we can help
Getting tax planning for rental income right is about steady, proactive housekeeping – not last‑minute patch‑ups. The rules are shifting (MTD from April 2026, FHL abolition, frozen thresholds), and HMRC is watching landlords more closely. We can review your portfolio, model personal vs company ownership, ensure you are using all available allowances, prepare for MTD, and keep your cashflow smooth with accurate, timely estimates.
If you’d like to reduce your tax bill and gain confidence that everything is compliant, get in touch with our property tax team. We’ll tailor a plan to your goals and make tax planning for rental income work for you. Contact us.