The deadline for landlords to file their self-assessment tax returns for the 2021-22 tax year is creeping up, with the final cut-off on Tuesday 31 January.
Those who forget or put off filing their return could be hit with an automatic £100 penalty plus further increases, so it’s important not to leave filing to the last minute.
Getting your figures and forms in order is a task seldom enjoyed, but here, Which? shares 12 top tips on getting your tax return finalised and your bill paid.
1. Remember to deduct your expenses
As the video explains above, HMRC allows you to deduct legitimate expenses from your taxable income. A range of which can be taken from your tax bill, so make sure you’re up to speed with what you can claim.
Running and maintenance costs for your buy-to-let property – such as letting agents‘ fees, landlord insurance and accountant’s fees – can all be taken off.
You can also claim the costs of replacing items in a furnished property, such as beds, carpets and white goods – but these need to be like-for-like replacements.
Whether you can deduct utility costs (such as water, gas and electricity) depends on whether it’s you or the tenant who is responsible for the bills in the tenancy agreement.
2. Keep track of minor costs
Small costs such as phone calls and texts to tenants are often overlooked by landlords, but they are expenses which can also be offset.
Travelling costs to your rented properties or paid-for subscriptions to industry publications can even be taken into account.
Over the course of a year, you might be able to claim back more than you think. You will, however, need to have clear evidence of your outgoings and be able to prove they were exclusively for business use.
3. Find out if you need to complete a self-assessment tax return
Before you think about filing for a tax return, you first need to consider whether you’ll actually have to. It is all dependent on how much rental income you received in the 2021-22 tax year.
The first £1,000 of rental income each year is tax-free, so if you took in less than this across your residential properties, you won’t need to fill out a return.
If your income was between £1,000 and £2,500, you may not need to complete a return, but you’ll need to contact HMRC for further advice.
Buy-to-let landlords who brought in more than £2,500 in rental income over the tax year must complete a self-assessment tax return.
4. Work out your taxable income
If you’re an individual landlord (ie your properties are owned in your name, rather than through a company), your profits will be taxed at the same rate as income you receive from other sources.
The income tax bands for the 2021-22 tax year were as follows:
Rates and bands differ in Scotland.
When calculating your final tax bill, you’ll need to add your rental profits to any other income you’ve earned during that tax year.
For example, if you earn £40,000 in your day job, you’ll pay tax on everything above £12,570 at the basic rate of 20%.
If you then add £15,000 in rental income (making a total of £55,000), this will push you into the next tax bracket, meaning you’ll pay 20% on your income between £12,571 and £50,270, then 40% on the remaining £4,730.
The tax thresholds and personal allowance (£12,570) have stayed the same for 2022-23, so the figures won’t change the next time you need to file a tax return.
5. Check if you’ll need to pay National Insurance
If you made a profit of more than £6,725 from letting property in 2021-22, you may need to pay National Insurance if HMRC considers you to be running a business.
This is likely to be the case if being a landlord is your main job, you let more than one property or you’re actively buying investment properties.
6. Don’t miss the deadline for filing…
The cut-off for filing your 6 April 2021 to 5 April 2022 tax return is midnight on 31 January.
For the past two years, HMRC has paused handing out £100 late-filing penalties – but the fines are set to make a return this year.
Those who miss the deadline and fail to file over the next three months will incur additional daily penalties of £10 which will continue to add up day-after-day, up to a maximum of £900.
7. …and don’t miss the deadline for paying
The cut-off for paying your tax bill is also on 31 January. Just like with filing, HMRC extended the payment deadline last year in response to Covid pressures – but there will be no relaxation of the rules this time around.
Landlords who don’t make the deadline will be charged interest each day from the date the fee was due. Interest is currently set at 6%, so the penalty can easily mount up in price.
8. Few excuses will be accepted by HMRC
Unless you have what HMRC considers a ‘reasonable excuse’, failure to make the deadline will be bad news for you financially.
HMRC does, however, stress it will ‘treat those with genuine excuses leniently’ and instead primarily focus on those who ‘persistently fail to complete their tax returns’.
There are very few excuses that will be accepted for late filing. The death of a partner or an unexpected hospital stay are among events deemed ‘reasonable excuses’.
9. Be aware of tax relief rules
Landlords are no longer able to deduct any mortgage expenses from their rental income to reduce their tax bill – instead, they can receive tax relief payments based on the amount of mortgage interest they pay.
The relief is paid as a tax credit, based on 20% of your mortgage interest payments.
This is less generous than the old system for higher-rate taxpayers, who effectively received 40% tax relief on mortgage payments.
For more information and example calculations, check out our full guide on mortgage interest tax relief.
10. Offset local licensing fees
If you have had to pay for a landlord licence from your local council, then you can deduct the figure from your tax return.
Licensing schemes have been on the rise in recent years and that trend is continuing as more councils look to roll them out.
Eligibility rules and costs of local licensing schemes vary significantly. In some areas, you might need to pay more than £1,000, but you will be able to deduct this as a business expense on your tax return.
11. Assess your portfolio as one business
Whether you own one or 11 homes, your rental profits from UK properties will be considered as one business (with one bottom line) when filing your tax return.
This means that if you made a loss on some of your properties, you can offset this against the profits you’ve made on others.
12. File your 2021-22 tax return with Which?
For a jargon-free, easy-to-use approach to filing this year’s tax return, try the Which? tax calculator.
You can use it to tot up your tax bill, get tips on allowances and expenses, and submit your return direct to HMRC.