UK rental income tax in 2026/27 is calculated by adding rental profit to your other income and applying the standard income tax bands (20%, 40%, 45%), then deducting a 20% basic-rate credit for residential finance costs under Section 24. Mortgage interest is not deducted from rental profit; it sits separately as the credit. This produces the counterintuitive result that the effective rate on rental cash profit can run well above the headline 20% or 40% rate for geared landlords.
This page is the step-by-step calculation walkthrough. The rate detail and pillar policy sits in our income tax rates for landlords 2026/27 guide. The Section 24 mechanics in depth are in our Section 24 complete guide. The £3,000 CGT annual exempt amount on disposal sits in our CGT AEA guide. Here we focus on the calculation walkthrough with four worked landlord profiles.
The Six-Step Calculation
- Sum gross rental receipts across all UK properties (one figure for the whole portfolio).
- Deduct allowable revenue expenses, excluding mortgage interest and other residential finance costs.
- The result is taxable rental profit for the year.
- Add taxable rental profit to your other income (employment, pension, dividends, savings interest) to determine which tax bands apply.
- Calculate income tax using the standard bands: 0% up to £12,570 personal allowance, 20% to £50,270, 40% to £125,140, 45% above.
- Deduct the Section 24 credit: 20% of residential finance costs, capped at the lowest of finance costs, property profits, or adjusted total income above the personal allowance.
The 2026/27 Income Tax Bands
| Band | Threshold | Rate |
|---|---|---|
| Personal allowance | £0 - £12,570 | 0% |
| Basic rate | £12,571 - £50,270 | 20% |
| Higher rate | £50,271 - £125,140 | 40% |
| Additional rate | Above £125,140 | 45% |
The personal allowance tapers at the rate of £1 reduction for every £2 of income above £100,000, fully eliminated by £125,140. Bands have been frozen since 2021/22 and the freeze runs to 2027/28 under current legislation. Separate property income tax rates of 22%, 42%, and 47% were announced in the Autumn Budget and are scheduled for 6 April 2027 under the draft Finance Act 2026; for 2026/27 the rates above apply to property income alongside other income.
Worked Example 1: Basic-Rate Cash-Buyer Landlord
Anna earns £35,000 PAYE and has bought one mortgage-free Sheffield flat outright in cash for £140,000. Annual rent £9,600. Annual expenses (insurance, letting agent fees, gas safety, repairs, EICR amortisation) £2,000.
| Step | Calculation | Amount |
|---|---|---|
| Gross rent | £9,600 | |
| Allowable expenses | (£2,000) | |
| Taxable rental profit | £7,600 | |
| Total income | £35,000 + £7,600 | £42,600 |
| Personal allowance | (£12,570) | |
| Taxable income | £30,030 | |
| Income tax at 20% | £30,030 × 20% | £6,006 |
| Tax attributable to rental (£7,600 at 20%) | £1,520 | |
| Section 24 credit (no finance costs) | £0 | |
| Net tax on rental | £1,520 | |
| Effective rate on cash profit (£7,600) | 20.0% |
Cash-buyer basic-rate landlords face the simplest case: 20% on net rental profit, full stop. Section 24 is irrelevant where there is no mortgage interest.
Worked Example 2: Higher-Rate Cash-Buyer Landlord
Ben earns £85,000 PAYE and owns the same Sheffield flat mortgage-free, with the same £9,600 rent and £2,000 expenses.
| Step | Calculation | Amount |
|---|---|---|
| Taxable rental profit | £7,600 | |
| Marginal rate (already above £50,270) | 40% | |
| Tax on rental profit | £7,600 × 40% | £3,040 |
| Section 24 credit | £0 | |
| Net tax on rental | £3,040 | |
| Effective rate on cash profit | 40.0% |
Higher-rate cash-buyer landlords pay 40% flat on rental profit. The annual difference vs the basic-rate version of the same property is £1,520. This is the simplest illustration of the marginal-rate problem.
Worked Example 3: Basic-Rate Geared Landlord
Carla earns £30,000 PAYE and owns the Sheffield flat with a £105,000 mortgage at 5.2% interest. Annual interest £5,460. Annual non-finance expenses still £2,000. Rent still £9,600.
| Step | Calculation | Amount |
|---|---|---|
| Gross rent | £9,600 | |
| Allowable expenses (excl. interest) | (£2,000) | |
| Taxable rental profit | £7,600 | |
| Total income | £30,000 + £7,600 | £37,600 |
| Tax on £37,600 (less PA) | £25,030 × 20% | £5,006 |
| Tax attributable to rental (£7,600 at 20%) | £1,520 | |
| Section 24 credit (20% × £5,460) | (£1,092) | |
| Net tax on rental | £1,520 − £1,092 | £428 |
| Actual cash profit | £9,600 − £2,000 − £5,460 | £2,140 |
| Effective rate on cash profit | £428 ÷ £2,140 | 20.0% |
For a basic-rate landlord, Section 24 produces a neutral 20% effective rate on cash profit: the 20% credit exactly offsets the 20% income tax that would otherwise apply to the interest portion. This is the design intent of the legislation: basic-rate landlords are unaffected.
Worked Example 4: Higher-Rate Geared Landlord
David earns £85,000 PAYE and owns the same Sheffield flat with the £105,000 mortgage. Same rent (£9,600), same interest (£5,460), same expenses (£2,000).
| Step | Calculation | Amount |
|---|---|---|
| Taxable rental profit | £7,600 | |
| Marginal rate (already above £50,270) | 40% | |
| Tax on rental profit | £7,600 × 40% | £3,040 |
| Section 24 credit (20% × £5,460) | (£1,092) | |
| Net tax on rental | £1,948 | |
| Actual cash profit | £2,140 | |
| Effective rate on cash profit | £1,948 ÷ £2,140 | 91.0% |
This is the headline Section 24 problem. The higher-rate landlord on the same cash profit as the basic-rate landlord pays £1,520 more in tax (£1,948 vs £428), an effective rate of 91% on the small cash profit that remained after expenses and interest. The mechanism is that the 40% income tax is charged on the full £7,600 (rent less non-finance expenses) but the credit relief is only 20%, leaving 20% of £5,460 = £1,092 of interest effectively un-relieved at the higher band.
The £1,000 Property Allowance Choice
Where gross rental receipts exceed £1,000, you choose between two methods:
- Method A (property allowance): deduct £1,000 from gross rents, pay tax on the rest, no other expenses allowed.
- Method B (actual expenses): claim all actual allowable expenses, no £1,000 allowance.
Method A wins when total non-finance expenses are less than £1,000 (rare for landlords with anything more than a single low-maintenance property). Method B wins almost everywhere else. The choice is annual, not permanent, so you can flex year by year. The allowance cannot be combined with Rent a Room relief on the same income.
The Personal Allowance Taper at £100,000
For landlords whose adjusted net income (broadly: total taxable income from all sources) exceeds £100,000, the £12,570 personal allowance starts to taper. The mechanic: £1 of personal allowance is withdrawn for every £2 of adjusted net income above £100,000. By £125,140 the allowance is fully eliminated.
For a landlord whose other income is in the £80,000-£90,000 range, adding rental income can push them into the taper, creating a marginal rate of 60% on that band of income (40% income tax on the £1, plus 40% recovered tax on the £0.50 of personal allowance lost = 60% effective on the marginal pound). This is one of the most punishing zones in the UK tax code for landlords, and pension contributions to keep adjusted net income below £100,000 are often the highest-return planning move.
Joint-Ownership and Form 17 Income Split
Property held jointly by spouses or civil partners has a default 50/50 income split for tax (ITA 2007 s.836), regardless of actual beneficial ownership. To override the default, you need:
- A declaration of trust establishing the actual beneficial ownership (e.g. 99/1 in favour of the lower-earning spouse).
- Form 17 filed with HMRC within 60 days of signing, declaring the income split exactly matches the beneficial split.
The election takes effect from the date Form 17 is filed (not retrospectively). For a couple with one higher-rate and one basic-rate spouse, Form 17 typically saves £1,500-£3,000 a year on a modest portfolio at zero ongoing cost. This is the highest-return single tax-planning move available to most landlord couples.
Adding It Up: Comparing the Four Profiles
| Profile | Net cash profit | Tax on rental | Effective rate |
|---|---|---|---|
| Basic-rate cash buyer | £7,600 | £1,520 | 20.0% |
| Higher-rate cash buyer | £7,600 | £3,040 | 40.0% |
| Basic-rate geared landlord | £2,140 | £428 | 20.0% |
| Higher-rate geared landlord | £2,140 | £1,948 | 91.0% |
The single biggest determinant of how much tax you pay on rental income is whether you are a higher-rate taxpayer with material mortgage interest. Everything else, including the £1,000 property allowance, the personal allowance, and most expense-claim optimisation, moves the needle by hundreds or low thousands of pounds. Section 24 moves it by thousands or tens of thousands.
What Counts Towards Other Income
Rental income is added to:
- Employment income (gross of personal pension contributions, where the contribution is via salary sacrifice or relief-at-source, treatment varies).
- Self-employment trading profit.
- Pension income (state pension, private pension, occupational pension drawdown).
- Other property income (FHL is now ordinary residential let income since 6 April 2025).
- Taxable interest and dividends (each have their own allowances of £500/£1,000 starting rate band and £500 dividend allowance respectively in 2026/27).
- Other untaxed income (cryptoasset profits, hobby income above the £1,000 trading allowance, royalties).
The combined total determines which tax bands apply. Rental profit is treated as "non-savings, non-dividend income" alongside employment and self-employment income, so it sits in the standard ordering at the bottom of the income stack.
MTD for ITSA: How the Reporting Changes
The income tax calculation does not change under MTD. What changes is the reporting cycle. From 6 April 2026 sole-trader landlords above £50,000 of qualifying income submit:
- Quarterly digital updates: 7 August (Q1), 7 November (Q2), 7 February (Q3), 7 May (Q4).
- Final Declaration: 31 January following the tax year.
The Final Declaration replaces the traditional Self Assessment SA100 for those in MTD. Threshold drops to £30,000 from 6 April 2027 and £20,000 from 6 April 2028. Sign-up checker: gov.uk/guidance/check-when-to-sign-up-for-making-tax-digital-for-income-tax.
The Incorporation Alternative
For higher-rate landlords with material mortgage interest where the effective rate above is biting, the structural fix is incorporation. A limited company pays corporation tax at 19% on profits up to £50,000, 25% above £250,000, with marginal-relief rates in between, and is not subject to Section 24. The SDLT cost of transferring the existing portfolio (5% additional-dwellings surcharge applied at market value under FA 2003 s.53) is the main offsetting cost, modelled in our SDLT on incorporation guide.
Common Mistakes That Inflate the Tax Bill
- Entering mortgage interest in the general expenses box instead of the Section 24 box, attempting a full deduction that fails compliance checks.
- Claiming capital improvements as repairs, missing the boundary set out in HMRC's PIM2020.
- Forgetting replacement-of-domestic-items relief on like-for-like furniture and white goods replacements (ITTOIA 2005 s.311A).
- Using the default 50/50 spousal split when Form 17 would route more profit to a lower-band spouse.
- Ignoring the personal allowance taper at £100,000, where rental income tips the landlord into the 60% effective marginal zone.
- Not tracking carry-forward of unrelieved finance costs under ITA 2007 s.274A when the three-way cap on the Section 24 credit bites.