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Landlords' Self-assessment Tax Returns: Advice

January 6, 2022

As we progress into the new year, the end of the financial year looms along with our tax obligations. If you have income from a rental property, you’re liable to pay self-assessment income tax - and by 31st January 2022 you need to have filed your annual tax return with HMRC (Her Majesty’s Revenue and Customs) and made the main payments for the year.

Registering for self-assessment

All landlords must register with HMRC. You must register for self assessment by 5th October within the tax year after the one in which you began receiving any rental income. If you haven’t already registered, you may be liable to a penalty.

For example, if you started your business after 5th April 2021, you must register by 5th October 2021 at the latest.

When you register, you should receive a Government Gateway user ID and a corresponding password. You can then use these credentials to set up your personal tax account, which allows you to conveniently manage your taxes online.

Once you are registered, you have the option to either file your tax return via the online or paper-based Self Assessment Tax Return.

Your accounting period runs for 12 months from the day you begin trading. So, if you start your business on 1st June, your accounting period will end on 31st May. You record all your income during the accounting period and all the allowable expenditure incurred for the business.

Record keeping

You must keep accurate records of the rent you receive, as well as your allowable expenses to work out your profit for tax. These include:

  • Tenancy agreements/contracts
  • Property purchase documents
  • Rent books
  • Receipts
  • Invoices
  • Bank statements
  • Mileage logs of property related travel

Allowable expenses

To work out your profit, you can deduct expenses from your rental income. Allowable expenses include:

  • Interest on a mortgage to buy a residential let property.
  • Maintenance and repairs to the property (but not improvements).
  • Water rates, council tax, gas and electricity.Insurance, such as landlords’ policies for buildings, contents and public liability.
  • Costs of services, including the wages of gardeners and cleaners.
  • Letting agent fees and management fees.
  • Legal fees for lets of a year or less, or for renewing a lease for less than 50 years.
  • Accountant’s fees.
  • Direct costs such as phone calls, stationery and advertising for new tenants.
  • Vehicle running costs related to your rental business.

You may be able to claim a deduction for the cost of replacing domestic items such as:

  • Movable furniture such as beds or wardrobes.
  • Furnishings including curtains, carpets and floor coverings.
  • Appliances such as televisions, fridges or freezers.
  • Kitchenware such as dishes, cooking utensils and cutlery.
  • Capital expenditure.

Allowable expenses do not include capital expenditure, such as buying a property or making substantial improvements, such as adding an extension, installing central heating if there was none before or installing a higher-specification kitchen.

If you carry out work on a property before renting it, the costs will also be treated as capital expenditure and therefore not allowable. However, you should keep records of capital expenditure as you may be able to set the costs against Capital Gains Tax if you later sell the rental property.

Additionally, mortgage interest is no longer considered an allowable deduction. You may, however, be able to claim a 20% tax credit based on your mortgage interest payments, so keep a record of these figures, too.

Read More: Green Homes Grant: How Can Homeowners And Landlords Benefit

Filing a tax return

When your business is up and running, you will have to file an annual self-assessment tax return – paper returns are due by 1st October, while the due date for online filing is by 31st January every year.

To complete the self-assessment form, you provide details of your business, income and expenditure relating to the rental business and any income from other sources, such as interest, benefits or capital gains.

The income and expenditure figures you provide relate to your earnings as a landlord during the tax year that ends on 5th April each year. So, by 31st January 2022, the figures you will file must cover the period ending 5th April 2021.

If you started your business after 6th April 2021, your tax return will be due by 31st January 2023 and will include earnings between 6th April 2021 and 5th April 2022.

Working out your payments

The payments you make are based on your profits only, not your entire income from your rental business.

In this simplified example, let’s assume that after deducting your expenses from a rental income of £85,000, you determine that your taxable profit is £26,000.

From there, you would then deduct your personal allowance. Your Personal Allowance is the amount that you are entitled to earn before your income becomes taxable.

For the 2021-22 tax year, the Personal Allowance amount is £12,570. Therefore, a profit of £26,000 less the Personal Allowance amount of £12,570 leaves £13,430 as your taxable profit.

The amount of tax you must pay on your taxable profit depends upon the tax band you fall into. The tax bands are currently as follows:

For the above example, a taxable profit of £13,430 would fall into the Basic Rate Tax Band and would therefore be taxed at 20 percent. Hence, the tax payable on £13,430 would be £2,686 (£13,430 x 20%).

On a taxable income of above £50,271 (and under £150,000), you would pay tax at the higher rate of 40 percent on the amount above £50,000. You may also have to pay Class 2 and Class 4 National Insurance contributions.

Class 2 contributions apply if your profits are over £6,515 for the 2021/22 tax year. You will have to pay £3.05 a week or £158.60 for the year. The additional Class 4 contributions are due if your profits are over £9,568 for the 2021/22 tax year. 

For more information on National Insurance contributions, visit the government website

Paying your tax bill

HMRC will calculate the amount of tax that you must pay and send you a tax bill for that amount. If you have filed a paper tax return, you can expect to receive a paper bill in the post in due course.

If you file your tax assessment online, however, you can view your tax obligation amount under the ‘View Your Calculation’ option online.

You will need to use your payment reference to pay your tax bill - this is also known as your Unique Taxpayer Reference (UTR), followed by the letter ‘K’.

The quickest and easiest options for paying your tax bill are:

  • Online banking
  • Telephone banking
  • Online using your debit or corporate credit card (you cannot use a personal credit card for this online transaction)
  • In person at your bank or building society
  • By using Chaps (Clearing House Automated Payment System)

It is also possible to pay your tax by Bacs, Direct Debit or cheque, but these options take longer to action and process.

There are penalties for missing the tax payment deadline, so it is important to make your payment as soon as possible to avoid being charged a penalty fee.

You will typically be required to make two payments on your tax account during the year - one by 31st January and the second by 31st July.

If your tax bill is more than £1,000, you will be required to make an advance payment towards your next Self Assessment bill.

Struggling to pay your tax bill?

Many people have had a difficult time financially due to the conditions of the pandemic, and paying a large tax bill can be daunting or simply impossible.

Thankfully, there is an option for managing your tax return payments that is easy to access. HMRC offers customers a self-serve option called ‘Time to Pay’, allowing Self Assessment customers to manage how they pay for their tax liabilities. This online service can be used for tax bills that do not exceed £30,000, with no requirement to talk directly to HMRC.

This service creates tailored monthly payment plans based upon how much tax is owed and how long the customer needs to complete the payments.

You can spread your tax payments over a maximum of 12 months and pay by Direct Debit so long as you:

  • Have no outstanding tax returns
  • Have no other tax return debts outstanding
  • Have no other current HMRC payment plans in place
  • Set the payment plan up no later than 60 days after the deadline passes

It is possible to utilise the Time to Pay option for tax debts over £30,000 or in cases where more than 12 months is required, but you will need to contact the HMRC helpline directly.

Pandemic-related tax relief for landlords

During the pandemic, a variety of government support schemes and tax payment extensions were dished out to assist landlords in crisis. Unfortunately, these extensions aren’t on the cards moving forward, so it’s important to prepare yourself for things to return to normal when it comes to meeting your tax obligations and on time.

There are still some ways that you may be able to offset some of the losses incurred during the pandemic, however.

For example, buy-to-let landlords who have struggled significantly with rent arrears and tenants requiring payment holidays can now carry these losses forward for some relief.

Such landlord losses can now be offset against the next year’s tax bill. For example, if you made a loss of £1,000 in this tax year, but then you turn a £25,000 profit in the next year, you will only pay tax on £24,000.

It is important to note that the HMRC will combine a landlord’s income and expenditures across all of their properties, so losses can only be carried over if the property portfolio has made an overall loss as a whole.

Portico can help with your accountancy needs

Self-assessment tax can be complex, particularly if you have recently started a new business or have encountered problems during the pandemic. If you need professional advice or assistance with completing your tax return, Portico’s accountants can help.

Get in touch with us on 020 7099 4000.

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