December 2021 – The Business Woman's Network

How to report rental income if you’re a company director

There are 2m limited companies actively trading in the UK, making up about 37% of the total business population (source: Federation of Small Businesses). Some have one company director, while others have more.

Company director income is often made up of a relatively small amount of wages paid through the company payroll, topped up with company share dividend payments, with both taxed accordingly. But what if you’re a company director with income from other sources, more specifically, from renting out property?

If you’re a company director who’s recently started renting out property or you’re considering it, you may be wondering how you report rental income, what expenses you can claim and how much tax you’ll pay. This guide provides a basic overview.

Here’s what we’ll cover

Whether you need to register for Self Assessment.
Paying tax on rental income when you’re a director.
Rental income records you need to keep.
What expenses you can claim.

Do you need to register for Self Assessment?

If you receive taxable income from renting out a property, you must declare those earnings by registering for Self-Assessment online and filing an SA100 tax return each year.

In the supplementary SA105 form, which you submit with the SA100, you detail your rental income and allowable costs/expenses for that tax year, so that your Income Tax and National Insurance liability can be calculated by HMRC. This is based on your net profit, accounting for your other income. HMRC will then send you a bill, which you pay directly.

You can, of course, rent out more than one property or jointly own a rental property, perhaps with a relative, partner, spouse or colleague, and you’ll be taxed according to your share of the net profits.

• HMRC has published guidance on filling out the SA105 form (PDF). You can also use it to declare furnished holiday lettings in the UK and European Economic Area.

When should you register for Self Assessment?

You can register as soon as you receive your first rent payment and HMRC recommends registering for Self Assessment as soon as possible.

However, you’re only required to register for Self Assessment by 5 October following the end of the tax year in which you received taxable rental payments. If you don’t, you risk having to pay a penalty.

Need to know! The deadline for online filing of your Self Assessment tax return is 31 January, following the end of the tax year on 5 April. Fines of £100 are payable if you’re late.

What rental income records should you keep?

You must maintain accurate financial records detailing all rent received, as well as any payments for additional maintenance or repairs your tenant pays you for, together with specific dates of when your property was occupied by a tenant.

You should also keep detailed records of costs incurred while managing and maintaining the rental property (see allowable expenses below). Recording your income and expenses/costs in accounting software is recommended, because it will save you a lot of time and effort when completing your Self Assessment tax return.

Also retain all receipts and invoices as proof of claimed expenses. There are apps you can get that automatically link to accounting software to update your total outgoings. HMRC can ask for proof of your expenses and go through your bank statements. Records must be kept for six years and you can be fined if your records are inaccurate, incomplete or lost.

Need to know! Keep a log of mileage you drive wholly and exclusively as a result of renting out your property (eg if you need to visit the property), as fuel and vehicle costs can be claimed as an allowable expense.

What allowable expenses can you claim?

Costs must be “wholly and exclusively” the result of renting out your property if they’re to qualify as allowable expenses. You can’t claim for company or personal expenses.

Allowable can expenses include:

property maintenance and repairs (eg replacing a broken window)
redecorating between tenancies
insurance (eg building, contents and public liability)
gardening and cleaning services
letting agent fees/management fees
legal fees for lets of a year or less
accountancy fees
direct costs (eg phone calls, stationery and advertising for new tenants)
fuel/vehicle costs (only the proportion used for your rental business).

Replacing domestic items such as baths, washbasins and toilets is allowable, because they’re classed as building repairs, but only if you replace like for like (ie the quality must not be superior).

Similarly, if your rental property is furnished or part-furnished, you may be able to claim for replacing worn, damaged or defective sofas, beds, carpets, curtains, fridges, washing machines, sofas, crockery, cutlery, etc, as long as the quality is of comparable value, not superior.

Landlords used to be able to deduct mortgage interest and other finance costs (eg mortgage arrangement fees) from their rental income to reduce their tax liability. But now you get a tax credit of 20% instead.

Need to know! You can’t claim allowable expenses for property improvements such as building an extension, but you may be able to subtract these costs to reduce your capital gains tax bill if you sell your rental property.

How much tax will you pay?

The standard tax-free Personal Allowance is £12,570 (2021/22 tax year) if you earn less than £100,000 a year. The Income Tax rates are different in Scotland, but in England and Wales:

If you earn between £12,571 and £50,270 a year, you will pay 20% Income Tax (Basic Rate) on your taxable income.
If you earn between £50,271 and £150,000 a year, you will pay 40% (Higher Rate) on your taxable income.
If you earn more than £150,000 a year, you will pay 45% Income Tax (Additional Rate) on your taxable income.

The wages you earn from your company via its payroll will be added to your rental income to determine your overall Income Tax liability.

If you rent out more than one property and or buy new properties to rent out, HMRC will consider it to be running a property rental business and you’ll need to pay Class 2 National Insurance contributions if your profits are £6,515 a year or more.

When you’re new to renting out property, no matter how much experience you have of running a company, it’s advisable to seek tailored tax advice from an expert. It could really help to maximise your rewards and take away the pain of having to complete tax returns.

About GoSimpleTax

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The software submits directly to HMRC and is the solution for the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment giving hints and tips on savings along the way.

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Ten top tips to help you get your Self Assessment tax return sorted for Christmas

Article by GoSimpleTax

Usually, each December, with the 31 January online-filing deadline looming, many people start to worry about completing their Self Assessment tax return, when they’d much rather be getting into the Christmas spirit. Even if you leave it until after Christmas, having to complete your Self Assessment tax return early on in the new year can be an unwelcome chore when you’re trying to get back into work mode.

If this is your 1^st return it may seem all the more daunting, but don’t put it off – filing early doesn’t mean paying early. The tax you owe will be payable on 31^st January.

Having to file your Self Assessment tax return is unavoidable if you earn money that’s subject to Income Tax. Thankfully, good advice and support can make a big difference. So, here are ten top tips to make Self Assessment tax return much less taxing, so you can look forward to a cracking Christmas and New Year.

1 Use accounting and Self Assessment filing software

Using good accounting software to accurately and regularly record your income and expenses can make completing your Self Assessment tax return much easier, because key numbers are automatically calculated for you. You can also use other third-party software that makes completing and filing your Self Assessment tax returns much easier, while ensuring that your Self Assessment tax returns are error-free.

2 Improve your Self Assessment know-how

Do some online research and search for advice from reliable sources. You may be able to find ways to save time and make sure that your Self Assessment tax return is properly filled out. Also read HMRC’s own guidance on Self Assessment tax returns. HMRC has published a comprehensive range of Self Assessment guidance, including concise YouTube Self Assessment videos and live and recorded webinars (registration required).

3 File your Self Assessment return now

Why put off completing and filing your Self Assessment tax return? You don’t have to wait for the deadline. In fact, you could have completed and submitted your Self Assessment tax return months ago, when the new tax year began on 6 April. If you can’t do it immediately, do it ASAP. Do yourself a favour: get it off your plate.

4 Give yourself enough time

You need to go through the Self Assessment tax return form thoroughly, paying due care and attention when entering data. The more you rush, the more likely you are to make mistakes that later need correcting. Often the reason why people rush is they’re battling the Self Assessment online filing deadline or they don’t give themselves sufficient time to complete their Self Assessment tax return.

5 Have all the necessary information to hand

As already explained, accounting software can take much of the legwork out of completing your Self Assessment tax return. Alternatively, have all relevant facts and figures to hand or at the click of a mouse, because having to go and find information, from hard-copy invoices, bank statements and receipts, etc, will mean that filling out your Self Assessment tax return takes much longer.

You’ll also need your UTR (ie the unique ten-digit reference number that enables HMRC to identify you), your National Insurance number, P60 if you’re also employed and paid via PAYE (it shows your earnings and tax paid in the tax year), records of earnings from all taxable sources (eg rental income, interest/investment income, pensions, state benefits, etc), details of expenses, etc.

6 Claim your rightful tax allowances and reliefs

Income Tax payers can claim a variety of tax allowances (upon which no tax is payable) and reliefs (which lower your profit and resulting Income Tax liability). Government website GOV.uk explains expenses you may be able to claim if you’re self-employed, as well as Income Tax reliefs and personal allowances. Do some research or seek professional advice to make sure that you’re claiming everything to which you’re entitled.

7 Consider using simplified expenses

“Simplified expenses” is an HMRC-approved way to claim business expenses using flat rates rather than working out actual costs, which can take much more time and effort. You can use simplified expenses for business mileage, operating a business from home or living at your business premises (eg if you run a B&B).

While saving you time when filling out your Self Assessment tax return, you should be sure that claiming simplified expenses won’t leave you out of pocket. GOV.uk offers an online simplified expenses checker toolthat enables you to find out.

8 Double-check your facts and figures

Once you’ve entered data into your Self Assessment tax return, double-check it all before submitting it to HMRC. Also take care when ticking boxes, as this is where mistakes can also occur. More serious errors can lead to a penalty if HMRC believes they’re the result of your being careless. Don’t let that happen. Don’t be sloppy.

9 Don’t miss the Self Assessment filing deadline

With so much to do, the run-up to Christmas can be a hectic, so, you may not manage to get your Self Assessment tax return done and dusted before the new year. Sometimes, that’s unavoidable. But still try to get it done early in the new year, so it’s out of the way. You don’t want to miss the online filing deadline of midnight on 31 January either, because this will result in a £100 penalty.

10 Reach out for Self Assessment support

In addition to HMRC’s online information resources, you can call its Self Assessment helpline (0300 200 3310 – Monday to Friday: 8am to 6pm). Make sure your personal details and address are up to date in your personal tax account, otherwise you could fail telephone security questions when asked. Also have your National Insurance number and Unique Taxpayer Reference (UTR) to hand when you call.

If the thought of completing and filing your first Self Assessment tax return or slogging your way through another one is all too much, you could always get an experienced professional to do it for you or at very least, check over one you’ve filled out. It may be cheaper than you think. Consider it a nice early Christmas present to yourself.