How Much Tax Do I Pay on UK Rental Income? 2026/27 Calculation Walkthrough

If you let property and pay higher-rate tax with a mortgage on it, the rate you actually pay on the cash you keep is almost certainly not the 40% you would guess. In a heavily geared year it can swallow nearly all of your rental profit. The reason is that your mortgage interest is not deducted from rental profit before the tax bands apply; it sits separately as a 20% credit under Section 24. Tax is charged on a profit figure higher than the cash you really banked, with only a flat 20% credit set against the gap. Four worked landlord profiles below show exactly how that plays out, pound for pound.

For the full rate detail, see our income tax rates for landlords 2026/27 guide; for Section 24 in depth, our Section 24 complete guide; and for the £3,000 CGT annual exempt amount when you sell, our CGT AEA guide.

How is tax on rental income worked out, step by step?

1. Sum gross rental receipts across all UK properties (one figure for the whole portfolio).
2. Deduct allowable revenue expenses, excluding mortgage interest and other residential finance costs.
3. The result is taxable rental profit for the year.
4. Add taxable rental profit to your other income (employment, pension, dividends, savings interest) to determine which tax bands apply.
5. Calculate income tax using the standard bands: 0% up to £12,570 personal allowance, 20% to £50,270, 40% to £125,140, 45% above.
6. 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.

What are the 2026/27 income tax bands and rates?

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%

Your personal allowance tapers by £1 for every £2 of income above £100,000, and is gone entirely by £125,140. The 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 at the Autumn Budget 2025 and enacted in Finance Act 2026 (Royal Assent 18 March 2026), taking effect from 6 April 2027. For 2026/27, the rates above apply to your property income alongside everything else you earn.

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%

If you bought in cash and pay basic rate, this is the simplest case: 20% on net rental profit, full stop. With no mortgage interest, Section 24 never touches you.

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%

If you pay higher rate but own outright, you pay 40% flat on rental profit. The annual difference against the basic-rate version of the same flat is £1,520 and comes purely from your own marginal rate. This is what your marginal rate alone does, before any mortgage enters the picture.

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%

While you stay within the basic-rate band, Section 24 leaves you with a neutral 20% effective rate on cash profit: the 20% credit exactly offsets the 20% income tax that would otherwise fall on the interest. That is the design intent of the legislation, so as long as all your income keeps you in the basic-rate band, you are unaffected. The catch is that the £7,600 of rental profit counts towards that band, so a rise in rents or other income can tip you over £50,270 and into David's position.

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 Section 24 problem that drove the headlines, and if you are geared and pay higher rate, it is your number. On the exact same cash profit as Carla, David pays £1,520 more tax (£1,948 against £428): an effective rate of 91% on the slim cash profit left after expenses and interest. The mechanism is simple once you see it. 40% income tax is charged on the full £7,600 (rent less non-finance expenses), but the credit relieves only 20%, so 20% of £5,460 = £1,092 of your interest goes effectively un-relieved at the higher band.

Should you take the £1,000 property allowance or claim actual expenses?

Where your 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 your total non-finance expenses come to less than £1,000, which is rare once you own anything beyond a single low-maintenance flat. Method B wins almost everywhere else. The choice is annual rather than permanent, so you can switch year by year as your costs change. You cannot combine the allowance with Rent a Room relief on the same income.

How does the personal allowance taper at £100,000 hit rental income?

Once your adjusted net income (broadly, total taxable income from all sources) tops £100,000, your £12,570 personal allowance starts to taper. For every £2 above £100,000 you lose £1 of allowance, and by £125,140 it is gone entirely.

If your other income already sits in the £80,000-£90,000 range, adding rental profit can push you into the taper and create a 60% marginal rate on that slice of income (40% income tax on the marginal £1, plus 40% recovered tax on the £0.50 of personal allowance you lose = 60% on the marginal pound). This is one of the most punishing zones in the UK tax code. A pension contribution that keeps your adjusted net income below £100,000 is often the highest-return move you can make.

How is rental income taxed on a jointly-owned property?

Property held jointly by spouses or civil partners has a default 50/50 income split for tax (ITA 2007 s.836), regardless of who actually owns what. To override the default, you need:

1. A declaration of trust establishing the actual beneficial ownership (e.g. 99/1 in favour of the lower-earning spouse).
2. 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 you file Form 17, not retrospectively. If one of you pays higher rate and the other basic rate, Form 17 typically saves £1,500-£3,000 a year on a modest portfolio at zero ongoing cost. For most landlord couples, it is the single highest-return planning move on the table.

How much tax do landlords pay? The four profiles side by side

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 other income gets added to your rental profit?

Your 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. Your 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.

Does MTD for ITSA change how much tax you pay?

MTD does not change the income tax calculation. It changes the reporting cycle. From 6 April 2026, if you are a sole-trader landlord with qualifying income above £50,000, you 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.

Could a limited company cut your rental income tax?

If you pay higher rate, carry material mortgage interest, and David's effective rate is biting on your portfolio, the structural fix is incorporation. A limited company pays corporation tax at 19% on profits up to £50,000 and 25% above £250,000, with marginal-relief rates in between, and is not subject to Section 24. The main offsetting cost is the SDLT on transferring your existing portfolio (the 5% additional-dwellings surcharge applied at market value under FA 2003 s.53), modelled in our SDLT on incorporation guide.

The mistakes that quietly inflate your rental income 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 you into the 60% effective marginal zone.
• Not tracking carry-forward of unrelieved finance costs under ITTOIA 2005 s.274A when the three-way cap on the Section 24 credit bites.

Related Reading

• Income Tax Rates for Landlords 2026/27
• Section 24 Complete Guide
• How to Claim Mortgage Interest on Rental Property
• SDLT on Incorporation Guide