Net rental income is the figure that drives your tax bill and your cash flow. For a UK landlord in 2026, calculating it correctly means understanding three different numbers (gross income, taxable profit, net cash flow), the Section 24 finance cost mechanism that puts a gap between them, the capital-versus-revenue distinction that decides which costs reduce income today versus which sit on the CGT base cost for later, and the rules that decide which expenses qualify. This guide walks through the full calculation with multiple worked examples, then explains the most common errors that cost landlords money on enquiry or on annual tax assessment.
Three different "net income" numbers, only one of them is taxable
| Figure | What it measures | Used for |
|---|---|---|
| Gross rental income | Total rent received in the tax year | MTD threshold test, lender stress tests |
| Taxable rental profit | Gross income minus allowable expenses (NOT minus mortgage interest, for personally-held BTL) | HMRC tax assessment, self assessment SA105 box 38 |
| Net cash flow | Gross income minus ALL paid costs (including mortgage interest) minus tax actually owed | Real-world bank balance impact |
The gap between taxable profit and net cash flow is the Section 24 effect. For a basic rate landlord with no mortgage the gap is zero. For a higher rate landlord with heavy mortgage interest the gap can be very large, sometimes making cash flow negative on a property that shows a taxable profit.
Step 1: Calculate gross rental income
Include in gross:
- Monthly rent payments received
- Parking, storage, garage, or pet supplement charges
- Utility re-charges (if tenant pays you and you pay the supplier)
- Retained portions of damage deposits
- Insurance payouts for loss of rental income
- Service charges collected and retained (not where collected and passed straight through)
Exclude:
- Deposits held in deposit protection schemes (only retained portions count)
- Rent received for a period outside the tax year (cash basis users only)
- Insurance payouts that directly fund repair work (these reduce the repair cost instead, see Step 5)
Step 2: Identify allowable expenses
Deductible against rental income (revenue costs):
| Category | Examples | Notes |
|---|---|---|
| Letting and management | Agent fees, tenant find fees, property management percentage | Fully deductible |
| Repairs and maintenance | Boiler servicing, plumbing repairs, repointing, repainting | Only true repairs, not upgrades |
| Insurance | Buildings, contents, landlord liability, rent guarantee | Fully deductible |
| Council tax and utilities | Voids council tax, utility bills you pay (not tenants') | Apportion for periods of personal use |
| Professional fees | Accountancy, bookkeeping, tenancy legal advice, tax advice | Capital tax advice (e.g., incorporation modelling) is generally capital, not deductible |
| Safety certificates | Annual gas safety, 5-yearly EICR, EPC | Fully deductible |
| Advertising | Online listings, agent advertising fees | Fully deductible |
| Travel | Mileage at 45p/mile (first 10,000 miles) | Primary-purpose trips only |
| Communications | Apportioned mobile, broadband, postage | Reasonable apportionment to rental use |
| Replacement of Domestic Items | Like-for-like replacement of furniture and white goods | Initial fit-out NOT eligible |
| Mortgage broker fees | Fees paid to arrange BTL finance | Within Section 24 for individuals (20% tax reducer) |
Not deductible against rental income:
- Capital improvements (extensions, upgrades, complete kitchen replacements with upgrade element)
- Mortgage interest, for personally-held BTL (treated separately under Section 24, see Step 4)
- Personal use expenses
- The cost of buying the property (this is capital, sits on CGT base cost)
- Your own labour
- Penalties and fines
Step 3: Apply the capital-versus-revenue test
The single most contested area in HMRC enquiries. The principle is: a repair restores the property to its pre-deterioration state, so it is revenue. An improvement adds something new or better than what was there before, so it is capital.
Practical examples:
- Replacing a worn-out 25-year-old wooden window with a similar wooden window: repair
- Replacing the same window with a uPVC double-glazed window: HMRC originally treated as capital, but post-2014 case law accepts this as repair where uPVC is now standard equivalent
- Adding a conservatory: capital
- Replacing a kitchen worktop with a similar worktop: repair
- Full kitchen replacement with significantly higher-spec units, appliances, and a new island: capital
- Replacing a broken boiler with a similar boiler: repair
- Installing central heating where none existed before: capital
- Loft insulation top-up: repair
- Loft conversion to add bedroom: capital
When the work mixes repair and improvement, apportion the cost. Document the apportionment with quotes and contractor descriptions.
Step 4: Apply Section 24 for personally-held BTL
Section 24 of Finance (No. 2) Act 2015 (now ITA 2007 s274A) restricts mortgage interest relief on individually-held residential property. From the 2020-21 tax year onwards, the full restriction applies: mortgage interest, broker fees, and arrangement fees are NOT deductible from rental profit. Instead, a 20% basic-rate tax reducer is applied to the lower of:
- The total finance costs
- The rental profit (after other allowable expenses but before Section 24 add-back)
- Your income above the personal allowance
The lowest of those three is multiplied by 20% to calculate the tax reducer. So a landlord with £20,000 of mortgage interest who only has £10,000 of rental profit gets a reducer based on £10,000 (the cap), worth £2,000. The unused £10,000 of finance costs carries forward indefinitely against future rental profit.
Step 5: Adjust for insurance proceeds and other recoveries
If insurance pays for repair work, the repair cost you can deduct is the net amount you actually bore. £6,000 repair funded by £4,500 insurance equals £1,500 deductible repair cost.
Insurance proceeds for loss of rental income are themselves taxable as rental income.
Worked example 1: basic rate landlord, single property, modest mortgage
Sarah owns one BTL flat in Manchester. PAYE income £35,000. BTL details:
- Gross rent: £900/month × 12 = £10,800
- Letting agent: £1,080 (10%)
- Repairs: £450
- Insurance: £280
- Accountancy: £350
- EICR (paid in this year): £170
- Mortgage interest: £4,200
| Gross rental income | £10,800 |
| Less allowable expenses (£1,080 + £450 + £280 + £350 + £170) | (£2,330) |
| Taxable rental profit (Section 24 ignores mortgage interest at this stage) | £8,470 |
| Tax at 20% basic rate (full profit falls in basic rate band) | £1,694 |
| Section 24 tax reducer (£4,200 × 20%) | (£840) |
| Net tax on the rental | £854 |
| Net cash flow (£10,800 - £2,330 - £4,200 mortgage - £854 tax) | £3,416 a year |
Worked example 2: higher rate landlord, four-property portfolio
James earns £60,000 PAYE and owns four mortgaged BTL properties:
- Total gross rents: £48,000
- Total allowable expenses (agent, repairs, insurance, accountancy, council tax voids, certificates): £8,400
- Total mortgage interest across four properties: £18,000
| Gross rental income | £48,000 |
| Less allowable expenses | (£8,400) |
| Taxable rental profit (Section 24 ignores interest) | £39,600 |
| Tax at 40% higher rate (whole rental profit falls in higher rate band given PAYE position) | £15,840 |
| Section 24 tax reducer (£18,000 × 20%) | (£3,600) |
| Net tax on rentals | £12,240 |
| Net cash flow (£48,000 - £8,400 - £18,000 mortgage - £12,240 tax) | £9,360 a year |
The same numbers under pre-Section 24 rules (interest deductible) would have given £21,600 of taxable profit, £8,640 of tax, and £12,960 of net cash. The Section 24 cost is roughly £3,600 a year on this portfolio.
Worked example 3: limited company ownership
Mr & Mrs Patel own the same four-property portfolio through a limited company:
| Gross rental income | £48,000 |
| Less all expenses including mortgage interest (£8,400 + £18,000) | (£26,400) |
| Taxable company profit | £21,600 |
| Corporation tax at 19% small profits rate | £4,104 |
| Net cash retained in company | £17,496 |
| If subsequently extracted as dividend (higher rate £17,496 × 33.75%) | £5,905 |
| Net cash in shareholders' hands after extraction | £11,591 |
Compared to James's £9,360 net cash flow in personal ownership, the company route gives £11,591 if extracted (£2,231 a year better) or £17,496 if retained (£8,136 a year better). See our BTL limited company pillar guide for the full incorporation cost-benefit analysis.
Worked example 4: HMO with higher operating costs
Olivia owns a five-bed HMO in Liverpool (licensed) earning £400 per room per month:
- Gross rent: £400 × 5 rooms × 12 months × 95% occupancy = £22,800
- HMO licence fee (annualised over 5-year licence): £80
- Council tax and utilities (HMO landlord usually pays these): £4,800
- Management agent (HMO-specialist): £2,280 (10%)
- Cleaning and gardening (communal): £1,560
- Repairs and maintenance: £1,800
- Buildings insurance (HMO premium): £950
- Gas safety, EICR, EPC, fire risk assessment: £450
- Mortgage interest: £6,000
| Gross rental income | £22,800 |
| Less all allowable expenses | (£11,920) |
| Taxable rental profit (Section 24 ignores interest) | £10,880 |
| Tax at 40% (Olivia is higher rate) | £4,352 |
| Section 24 tax reducer (£6,000 × 20%) | (£1,200) |
| Net tax | £3,152 |
| Net cash flow (£22,800 - £11,920 - £6,000 mortgage - £3,152 tax) | £1,728 a year |
HMO gross yields look attractive but the operating cost ratio (52% of gross in Olivia's case) eats heavily into net returns. Always model the HMO position with realistic operating costs before assuming the headline yield translates to bank.
MTD for ITSA and quarterly reporting
MTD for Income Tax Self Assessment went live on 6 April 2026 for sole-trader landlords with gross combined property and self-employment income above £50,000. Threshold drops to £30,000 from 6 April 2027 and £20,000 from 6 April 2028. Quarterly updates report cumulative income and expenses against HMRC standard categories. The final declaration (replacing the old annual SA100/SA105) is where Section 24 reducer, brought-forward losses, capital allowances, and other annual adjustments are applied. So the calculation logic above is unchanged, you just report the building blocks four times a year instead of once.
Common calculation errors
- Treating mortgage interest as a normal expense. Personally-held BTL must add interest back to profit; the tax reducer is separate. Many DIY filers get this wrong.
- Claiming capital improvements against income. Boiler upgrade where central heating did not exist before is capital. Adding a conservatory is capital. These costs add to CGT base cost, not income deduction.
- Claiming the initial fit-out as RDIR. RDIR only applies to replacements, not first installation.
- Forgetting void council tax is deductible. Many landlords pay it without claiming.
- Including the full mortgage payment, not just interest. Capital repayment is not deductible (it builds equity). Only interest qualifies for the Section 24 tax reducer.
- Mixing property and personal expenses. Apportion mileage, mobile, broadband, home office time properly.
- Missing RDIR opportunities. Many landlords forget to claim replacement washing machines, fridges, sofas.
- Failing to track Section 24 carry-forward. Where finance costs exceed rental profit (often when newly-acquired heavily-mortgaged properties have void periods), the unused tax reducer carries forward indefinitely.
Next steps
For supporting reading, see our Section 24 pillar guide, our landlord tax deductions complete list, our income tax rates for landlords guide, and the HMRC Property Income Manual for the official position on each expense category.
If you would like a fixed-fee review of your draft self assessment before you file, send us your rough numbers and supporting receipts using the form below. We typically find £1,000 to £3,000 of missed deductions on first-pass reviews for mid-sized portfolios.