If you are a landlord in the UK, you can choose the best letting structure to save the most rental income tax.
If you let property as a sole proprietor, in a partnership or via a company, the basic steps to work out your tax are similar – you arrive at a net profit and then apply the relevant tax rates. But the rates and allowances you use will depend on which structure you choose.
How Landlords’ Rental Income is Taxed as a Sole Proprietor or Partner
- You calculate your property profit by deducting all allowable expenses (repairs, agent’s fees, insurance), plus the basic-rate mortgage interest allowance (Finance Act 2017).
- That net profit is added to your other personal income and taxed at your marginal Income Tax rates: 20% up to £50,270, 40% up to £125,140 and 45% above. Your personal allowance (£12,570) applies first, and there is no National Insurance on pure rental profits.
- Partnerships work the same way – the partnership computes its total rental profit, then each partner is taxed on their share at their own personal rates.
How Landlords’ Rental Income is Taxed in a Company
- The company calculates its net rental profit by deducting all expenses – including full mortgage interest – as a trading expense (Corporation Tax Act 2009).
- Profits are subject to Corporation Tax (25% for most companies in 2025/26).
- If you withdraw profits as dividends, you pay Dividend Tax in your hands. After the £500 dividend allowance, rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate and 39.35% for additional-rate. No National Insurance is due on dividends.
Why it Matters in Practice
- As a sole proprietor, you enjoy the personal allowance and only pay Income Tax on profits, but your effective rate can be up to 45%.
- In a company you pay tax twice – 25% Corporation Tax, then Dividend Tax – but you can often defer withdrawing funds or pay yourself a mix of salary and dividends. Interest relief is unrestricted at company level.
How SAIL International Can Help You Save Tax
- We’ll calculate which structure gives you the lowest overall tax bill – sole trader, partnership or corporate landlord.
- We’ll help you with year-end planning to maximise expense relief and timing of dividends.
- We’ll advise on setting up a property management company, drafting shareholder agreements and making pension contributions to smooth your personal tax.
Illustrative Example: Meet Emma, who owns a small flat producing £30,000 rent, with £10,000 of expenses and £15,000 of mortgage interest. Emma has no other income.
Renting as a sole proprietor landlord:
- Net profit = £30,000 – £10,000 – 20% of £15,000 (£3,000) = £17,000
- Income Tax at 20% = £3,400; no NI due
- After all her expenses Emma keeps £1,600.
Renting as a limited company landlord:
- Net profit = £30,000 – £10,000 – £15,000 = £5,000
- Corporation Tax at 25% = £1,250; retained profit = £3,750
- If she distributes all £3,750 as a dividend, after the £500 allowance £3,250 is taxed at 8.75% = £284
- Emma’s net proceeds = £3,750 – £284 = £3,466.
Key Legislation and References
- Income Tax (Trading and Other Income) Act 2005 – Rules on property profits.
- Finance Act 2017 – Restriction of mortgage interest relief to 20%.
- Corporation Tax Act 2009 – Full expense relief for corporate landlords.
- Taxation of Dividends – Finance Act 2022 increased dividend rates.
Choosing the right vehicle for your rental business can save or cost you thousands in tax each year.
We at SAIL International will run the numbers for your personal circumstances and help you implement the most tax-efficient solution.
Get in touch for a tailored review.
Disclaimer
This article is for general guidance only. Individual circumstances vary and legislation changes frequently. SAIL International Limited does not guarantee any specific outcome. You should seek professional advice before acting and use this article at your own risk.