Taxation | Rental Property Income | Contractor Accountant Liz ChapmanTaxation of rental property income

From 6 April 2017 mortgage interest is no longer fully deductible as an expense against property income.

Gradually over the next four years the amount of interest deducted against income is reducing and instead relief is obtained at 20% as a deduction from tax.

The relevant percentages are:

2017/2018 2018/2019 2019/2020 2020/21
Deductible against income 75% 50% 25% 0%
Deduction at 20% against tax 25% 50% 75% 100%


So how will this look in practice?

If we assume rental income of £90,000 from a portfolio of properties, expenses of £15,000, mortgage interest of £35,000 and that the tax payer is in the higher rate (40%) tax bracket before property income.

2017/18 2018/19 2019/2020 2020/2021
Rental income 90000 90000 90000 90000
Property expenses -15000 -15000 -15000 -15000
Mortgage interest -26250 -17500 -8750 0
Net property income 48750 57500 66250 75000
tax at 40% 19500 23000 26500 30000
Less: mortgage interest relief -1750 -3500 -5250 -7000
Tax payable 17750 19500 21250 23000

What if you are on the threshold between the basic rate and higher rate tax?

If your income, including net property income is high enough to fall into the 40% tax bracket then even though you were a basic rate tax payer under the old rules you may find yourself taxed at 40% on part of your income and only able to offset the mortgage interest relief at 20%.

What can you do?

Make sure you keep a record of all your expenses and claim for everything

If you can control some of your other income, for example dividend income then make sure you reduce your dividends to stay below the 40% tax threshold.


If you would like help in completing your self-assessment tax return for 2017-18 and future periods then please get in touch via the website or give us a call.