What is a landlord tax calculator?

Introduction

Landlord tax calculators are there so that you don’t overspend on the amount of tax you owe as well as hit any bumps in the road with trying to work out which amount of tax you owe from each type of tax there are.

As a landlord, you will be faced with a lot of different taxes such as stamp duty, and corporation tax if you are a limited company and there are other smaller things that are hard to understand like tax credits. In this article, you’ll be able to learn about how much tax you should pay as a landlord alongside a few tricks on how to increase the number of deductible costs in your property business. 

So read on for a guide on the topic so you aren’t caught out with taxes you didn’t expect to pay.

What taxes do you have to pay as a landlord?

One of the most confusing things about being a landlord is working out the amount of tax you owe but before you can do that you have to know what tax you are eligible to be bought.

1: Stamp duty

Stamp duty is first on the list because it is the first type of tax landlords have to pay most of the time. This is because it is paid on the purchase of the house the landlord buys and is paid as a percentage of the sale.

Stamp duty is always paid by the buyer of the house and the rates at which it is paid differ slightly between Scotland, Wales and England. There are also tax exemptions for those who are first time buyers but stamp duty is paid between 0% and 12% depending on the value of the home in England.

2: National Insurance

National insurance is a tax that is pooled into a fund by the UK government that aids with benefits that members of the UK can enjoy like the pension fund, maternity allowance and job seekers allowance.

This is a tax that everyone in the UK can benefit from and all employers and employees have to pay as long as you are earning over a certain threshold. So this tax is not one that only applies to being a landlord but is a blanket tax for all people much like income tax.

3: Capital gains tax

Capital gains tax is paid on the appreciation of a property, only coming into effect if there is an increase in the value of the property. This is great because it means that a landlord will never have to pay additional tax for money they didn’t make if the property price remained the same or depreciated. This tax is also always paid by the seller whereas stamp duty is paid by the buyer.

This tax is there because it helps tax the appreciation landlords make on the value of a home. This reduces the amount of money landlords can make just by buying and selling property and causing landlords to look for a combination of rental income and property appreciation to make their money on an investment.

4: Inheritance tax

Inheritance tax is something that is applied to people who have passed away on all their possessions, not just a home. Typically, this rate of tax for this type of tax is 40% and is only charged on the amount of the value of a home that falls above a certain threshold.

This threshold changes but as of 2022, it is £325,000. There are also a few more complications involved with inheritance tax like calculating probate and using a calculator to work out the value of the estate. If you are not sure, the Government provides an inheritance tax calculator here.

5: Rental income tax

The most talked about type of tax amongst landlords is the rental income tax. This is because it was recently changed so rental income tax is now charged on the net income from the rents of landlords rather than the gross profit after mortgage payments.

There have been other amendments to the law which makes things less severe like tax credits that are there to reimburse lower earning landlords. However, in order to get around this, a lot of landlords have instead moved properties into a limited company rather than keeping their investments in their personal name.

What qualifies as rental income?

Gross rental income is the amount of money that you can say you made as profit from a property. Whereas net rental income is the amount of rental income there is in total. 

The net is fairly straightforward and the gross is calculated by deducting only the allowable expenses from a property. This includes the general maintenance of a property, accounting fees, letting and management fees, insurance costs, utility bills and council tax.

You cannot deduct probably the most expensive expense in a property business which is the mortgage repayments anymore. So landlords have to pay tax on the rental income and then pay off their mortgage payments on top of this.

How to calculate rental income tax on multiple properties

The process of calculating the tax is the same on a single property as it is for multiple properties. The only difference is if you pay yourself a salary from a limited company, with multiple properties it would be more likely you earn more money and would have to pay a higher rate of personal income tax.

Having said this, this is dependent on whether you have your properties in your personal name or not and if you choose to pay yourself a salary from the property investments you make.

How does income tax work with rental income?

There are two ways you will pay tax on the rental income from a property. This is dependent on whether you have a property that is in a limited company or you have the property in your personal name. Whenever you have a property listed in your personal name, income tax applies. Here’s how it works.

You will first calculate the net rental income of a property which is the first step. You then take this figure and deduct all the allowable expenses from the property. Afterwards, you would then charge a rate of income tax which is specific to the tax band you’re in. Finally, you will deduct the final mortgage payments and add on the mortgage interest credit that is available to you.

To use a real life example, if you had a property that produced £10,000 of net income and you wanted to know how much tax you would have to calculate. First, take the £10,000 figure and deduct expenses which are perhaps £1,000 (home insurance, repairs etc.). 

You would then pay your personal income tax which may be £3,600 (paying 40% tax as a higher-income tax payer). Finally, you would be eligible for a tax credit which would reimburse you with £1,400 (20% AS of 2022).

At the end of the calculation, there is £1,400 worth of tax left to pay. 

What are the deductible costs for income tax?

As a result of the rules recently changing and mortgage payments not being a deductible expense to produce a rental profit. It is confusing to know what exactly is allowed. To be deducted. Examples include maintenance costs, utility bills and the general maintenance of a house.

If you deduct any other expenses that are not allowed, this is illegal and you may face a fine or worse be charged interest on the tax you should have paid. This can be extremely damaging if the interest has accrued over many years. This is why it can be useful to make tax digital for landlords so you can calculate tax based on current rules a lot easier with reminders and alerts for anything that goes wrong.

Digital software would be able to tell you about the costs that aren’t allowed to be deducted such as mortgage payments and private telephone calls. In general, anything that is able to be classed as a personal expense that doesn’t have a direct correlation with the function of a property business will fall into his category.

At what stage do you pay tax on rental income?

You always pay tax on rental income at the start of every tax year which is at the beginning of April. You will have to register with HMRC and you may have to get other professionals involved to help meet the deadline.

What is used in a landlord tax calculator for buy to let mortgages?

When calculating the tax a landlord has to pay to buy to let mortgages. One of the biggest factors is considering their personal income, this will put a landlord into one of four categories of income tax. 

A figure of personal income where the landlord pays no tax, a basic rate where a landlord pays 20% tax, a higher rate where a landlord pays 40% and an additional rate where a landlord has to pay 45% tax.

The table above alongside other factors such as whether the landlord has their property in a limited company, the amount of taxable expenses they have had for the year (which can vary greatly) all go into calculating exactly what the tax is for a landlord.

Should you put a buy to let property in your personal name or a limited company?

Usually for those who fall into the higher rate and additional rate of income tax which is 40% and above, you will benefit from keeping property in a limited company because a limited company is charged corporation tax which is only 20% as opposed to 40% in your personal name.

For those who are putting property in their personal name on a lower income, there usually isn’t much difference between starting a limited company or putting a property in your personal name as the tax you will pay is about the same once you have paid your income tax and deducted a personal income from that too.

How to pay taxes as a live in landlord

First of all, it is worth noting you cannot sign a tenant under an assured tenancy if you live in the property too. This is because assured tenants are entitled to their own space.

Instead, you would have to sign an excluded tenancy or a lodging agreement. In a lodging agreement, no tax has to be paid on rent collected up to £7,500 based on the rent-a-room scheme. Then, any additional rent above this threshold would be charged at the rate of personal income.

See the government’s guide on these rules here if you want more information on everything to do with becoming a live-in landlord, taxes included.

In conclusion

In conclusion, using a rental income calculator can be advantageous for those who struggle with the various tax laws in the UK or simply because they want to get a second opinion on the tax that they have calculated for themself. So be sure to use a rental income calculator for the UK and also double check if you are missing anything by entering the right information too.