Landlords - Re-evaluating and increasing rent & tax implications

If you’re a landlord, then getting a high return on your investments is generally your main goal. With house prices rising and potentially landlords leaving the industry, meaning the rental market is buoyant, now may be the time you are considering increasing the rents of your tenants. In this article, we cover rent increase and what financial and tax implications these may have.

When can landlords increase the rent?

Generally for periodic tenancy contracts, landlords can typically only increase rent once a year without a tenant’s agreement. It’s important to communicate with your tenants when in the year rent may increase and be sensitive to your tenant’s needs as well.

For fixed term tenancies i.e. agreements for six months to a year for example, landlords can only increase the rent at the end of the fixed term. Unless you have a clause in the tenancy agreement that states you can review and increase the rent during the term.

Reasons to increase the rent

There can be many reasons why landlords look to increase rent and these include:

• Rising house prices.
• Increased costs.
• Popularity of an area is increasing.
• If there is neighbourhood enhancement.
• Property improvements.

Tax implications of increasing rent

When you rent out property you may have to pay tax. You have to pay Class 2 National Insurance if your profits are £6,515 a year or more and what you do counts as running a business, for example if all the following apply:

• being a landlord is your main job.
• you rent out more than one property.
• you’re buying new properties to rent out.

If your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.

If you rent a property you personally own then the first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’.

Contact HMRC if your income from property rental is between £1,000 and £2,500 a year.

You must report it on a Self Assessment tax return if it’s:

• £2,500 to £9,999 after allowable expenses.
• £10,000 or more before allowable expenses.

Raising rent, could tip your profits over the £6,515 threshold or could push you into having to complete a Self Assessment, so you need to consider this before raising rent as the tax you pay may cancel out the rise you make.

Letting a property – income tax

You need to pay Income Tax on the income you earn when letting a property. The rules for calculating Income Tax on rental income have changed, coming fully into force in the tax year 2021–22.

Landlords must pay Income Tax on all rental income after allowable expenses (such as utility bills, maintenance costs, insurance costs, advisors fees and property management fees) have been deducted. They can then claim a tax credit worth 20% of the annual mortgage interest.

Income Tax on rental income is calculated as per below:

Up to £12,570: no income tax

£12,571–£50,270: 20 per cent (basic rate)

£50,271–£150,000: 40 per cent (higher rate)

£150,000+: 45 per cent (additional rate)

Rental income is added to any other income you receive, so if your income is near the higher end of one of the three brackets above, it could move you into a higher bracket.

So, be aware that increasing rents will raise your income and again could move you into another tax bracket if your income is near the thresholds above.

How much can a landlord increase the rent by?

There isn’t a set limit on what a private landlord can increase rent by.The government says any rent increases must be ‘fair and realistic.’ But bear in mind if the increases you are proposing would cover any additional tax you may have to pay or the effects on your income should you enter a higher tax bracket.

Alternatives to increasing rent

While increasing rent may be your first thought, there could be alternatives worth considering, especially to avoid losing a good tenant.

Look at reducing your costs, such as switching mortgages, DIY property management or saving on property maintenance.

If you’re a new landlord then download our dns property guide for first time landlords and trade smartly.

If you need any help or advice on tax for landlords or have questions on your taxable property than we can help. Here at dns accountants, we look after thousands of landlords across the UK and have specialist landlord property tax experts and landlord packages.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.