How to Optimise Your Tax Savings if You Have a Rental Property as a Side Business

Owning a rental property is an effective way to boost your income, but it also comes with specific tax challenges. Whether you're managing a single buy-to-let property or operating through a limited company, understanding how to optimise your tax savings is crucial. With the right knowledge and strategies, you can reduce your tax burden and make the most of your rental income.

This guide will focus on simplifying rental property tax obligations, exploring savings opportunities, and helping you choose the best ownership structure for your rental side business.

How Tax on Rental Income Works

When you earn income from renting out a property, it is subject to UK taxation rules. Rental income must be declared to HMRC through a self-assessment tax return. You are taxed on your rental profits, which are calculated as your rental income minus allowable expenses such as repairs, mortgage interest, and maintenance costs. These profits are added to your other income and taxed based on your applicable income tax band. Basic-rate taxpayers pay 20%, higher-rate taxpayers pay 40%, and additional-rate taxpayers are charged 45%.

For example, consider Emma, who earns £12,000 per year from a rental property. After deducting £4,000 for mortgage interest, £1,000 for repairs, and £500 for property management fees, her taxable profit is £6,500. The amount of tax Emma owes depends on her overall income and tax bracket.

Understanding these basics is the starting point for optimising your tax savings.

Tax-Saving Strategies for Individual Landlords

If you own a rental property as an individual, reducing your taxable income can result in significant savings. There are several strategies you can use to lower your tax liability.

One way to optimise savings is by claiming allowable expenses. Costs such as repairs, property management fees, and building insurance are all eligible. For more guidance on what qualifies, check our guide on allowable expenses for landlords. For instance, Paul, who owns a property in London, reduces his taxable income by £3,000 every year by carefully reviewing and claiming deductible expenses.

Another way to save is through the Rent a Room Scheme. If you rent out a room in your home, you can earn up to £7,500 per year without paying tax. Importantly, the scheme applies even if you're renting through online platforms like Airbnb. For further assistance, review HMRC's rules on Renting a Room.

Lastly, any essential items purchased for the property, such as furniture or appliances, open up the opportunity to claim capital allowances. This reduces your taxable profit by offsetting these costs.

Benefits of Holding Rental Properties in a Limited Company

For landlords with larger portfolios, managing properties through a limited company can lead to substantial tax advantages. Instead of being taxed at personal income rates, rental profits in a limited company are subject to the corporation tax rate, which is currently set at 20% but will rise to 25% for profits exceeding £250,000.

There are several benefits unique to this structure. Firstly, limited companies have more flexible rules for deductible expenses, especially regarding mortgage interest. Secondly, they allow landlords to pay themselves through dividends, which can be far more tax-efficient than withdrawing rental income directly. Lastly, they offer potential reductions in capital gains tax when properties are sold.

For example, Mark, a landlord with three properties operating through a limited company, benefits from lower personal tax obligations and reduced capital gains liabilities on property sales.

Individual vs Limited Company Ownership

Choosing between individual ownership and a limited company depends on your unique circumstances. For landlords with one or two properties, sticking with individual ownership is often simpler and more cost-effective. However, for those with growth ambitions, incorporating a property business may unlock significant advantages.

For instance, while individuals are taxed directly based on their personal income tax bracket, limited companies offer flexibility. Owners can withdraw profits through a combination of salary and dividends, reducing their effective tax rate. Limited companies also offer benefits for estate planning, as shares can be passed on more tax-efficiently than physical real estate properties.

How Tax Specialists Can Help

Managing property tax efficiently can feel overwhelming, but professional support simplifies the process. At Virtue Accountants, we specialise in helping landlords and investors maximise their tax savings.

Our expert services include identifying hidden allowable expenses, navigating corporation tax planning for limited companies, and offering solutions to reduce capital gains and inheritance tax liabilities.

Take Charge of Your Rental Tax Strategy

Owning a rental property is rewarding, but the key to maximising your rental income is being proactive about tax planning. By using the right strategies, you can minimise your tax burden and boost your earnings. Whether you’re running a single property or managing a broader portfolio, Virtue Accountants can help you confidently take control of your finances.

Contact Virtue Accountants today for tailored, stress-free support that transforms rental property tax from a headache into a strategic advantage.