How to Avoid Paying Tax on Rental Income Legally? [Guide]

You can usually avoid paying tax on rental income by reducing the tax you owe through allowable expenses, available tax reliefs, efficient ownership structures, and careful property income planning.

HMRC's latest figures show that landlords claimed more than £29 billion in allowable expenses in 2023/24, yet many still miss out on deductions and reliefs they're entitled to. 

This guide explains the main ways to reduce your rental income tax bill in 2026/27 while staying compliant with HMRC rules.

Key points

• Claiming all allowable expenses can significantly reduce your tax bill 💰
  Costs such as letting agent fees, repairs, insurance, service charges, and certain professional fees can all reduce your taxable rental profit if they're used wholly and exclusively for your rental business.
• Tax reliefs and allowances can provide additional savings 🏠
  The Property Allowance and Rent-a-Room Relief can reduce the amount of rental income subject to tax, depending on your circumstances and the type of property income you receive.
• Ownership structure can have a major impact on how much tax you pay 📊
  Sharing ownership with a lower-tax-paying spouse or using a limited company may improve tax efficiency, although both options come with rules, costs, and potential drawbacks.
• Good record-keeping makes it easier to maximise deductions 🚀
  Keeping accurate records throughout the year helps ensure you don't miss valuable deductions. ANNA combines a business account, automated bookkeeping, receipt storage, real-time tax estimates, and Self Assessment filing to help landlords stay on top of their tax obligations.

How rental income is taxed

Rental Income Tax is charged on your rental profit, not your total rental income. Your rental profit is calculated by deducting allowable expenses from the rent you receive.

Understanding the available allowances and tax bands is the first step towards reducing your tax bill.

The Property Allowance

For 2026/27, HMRC gives every landlord a £1,000 property income allowance, so if your gross rental income is £1,000 or less in the tax year, you don't need to report it. 

If it's above that, you can either deduct the £1,000 allowance instead of actual expenses, or claim your real allowable expenses, whichever gives you the lower tax bill.

Understanding where you sit relative to the main Income Tax thresholds matters, too, because rental profit is added to any other income you have. 

Here's a quick reference for 2026/27: 

The Personal Allowance and higher rate threshold are currently frozen until April 2028.

Because rents have increased considerably, more landlords are finding themselves tipped into a higher band without any change to their tax planning, which makes claiming every legitimate deduction more important than ever.

Using your partner's Personal Allowance

If you jointly own a rental property, but one partner has a lower income, transferring a larger share of the property to them can shift rental income into a lower tax band. You can do this via Form 17 (for unequal splits), alongside a Deed of Trust or Declaration of Trust that reflects the actual ownership shares.

Keep in mind that the ownership change needs to be genuine and legally documented, not just a reallocation for tax purposes.

How to avoid paying tax on rental income: Allowable expenses you can claim

HMRC allows you to deduct business expenses from your rental income. Here's what qualifies:

Letting and management costs

Anything you pay to find or manage tenants is usually deductible. That covers letting agent fees, ongoing management charges, advertising costs, and accountancy or tax return fees that relate specifically to your rental business. 

If your agent charges a renewal fee each time a tenancy is extended, that qualifies too.

Property repairs and maintenance

Repairs that restore something to its original condition are deductible. This includes fixing a broken boiler, repairing a leaking roof, repainting between tenancies, and replacing fixtures. 

What you can't claim is improvement work. For example, if you replace a basic kitchen with a higher-spec one, HMRC generally treats the equivalent replacement cost as a repair expense, while the upgraded element is a capital improvement. 

Although that kind of expense isn't deductible from your rental profits, you may be able to include it in the property's cost basis when calculating Capital Gains Tax if you sell the property in the future. 

Replacement of Domestic Items Relief

When you replace white goods, furniture, curtains, or carpets in a furnished rental, you can claim the Replacement of Domestic Items Relief. This covers the cost of a like-for-like replacement, not an upgrade.

This relief replaced the old 10% wear-and-tear allowance, which was abolished in April 2016.

Pre-letting expenses

Some expenses you had before your first tenant moved in can still be claimed against rental income. To qualify, the expense:

• Must have been made within seven years before the rental business started 
• Would have been an allowable expense if the property had already been let

Common examples include advertising for tenants, insurance, and certain professional fees. However, major renovation or improvement work carried out before letting the property can't be deducted from rental income.

What about finance costs?

Since April 2020, landlords who own residential property personally can no longer deduct mortgage interest directly from rental income. Instead, you receive a 20% tax credit on your finance costs.

This change affects higher-rate taxpayers the most, and it's one of the main reasons landlords consider incorporating. 

The Furnished Holiday Lettings (FHL) regime was abolished from 6 April 2025, so holiday lets are now generally taxed in the same way as other residential rental properties. As a result, the previous FHL benefit of full deductions of finance costs is no longer available to landlords. 

Other deductible costs

Beyond the main categories, there's a range of smaller expenses that add up.

Here's what you can deduct:

• Buildings and contents insurance premiums 
• Ground rent and service charges (if you hold a leasehold property) 
• Council tax and utility bills you pay as the landlord
• Professional fees, such as legal costs for renewing a short lease 
• Landlord licensing fees 
• Mileage for travel to your rental property

💡 Did you know? 

ANNA's Auto Accountant can automatically tag and store your rental receipts, making Self Assessment significantly less complicated. You can also export a summary directly to your accountant.

The Rent-a-Room Relief

If you rent out a furnished room in your own home, the Rent-a-Room scheme lets you receive up to £7,500 per year tax-free (£3,750 if you share the income with someone else). 

The relief applies automatically if your income is below the threshold. If you earn more than £7,500, you can either pay tax on the excess or calculate your profit under the normal rental income rules, whichever results in a lower tax bill.

Does holding property through a limited company make sense?

One of the biggest questions for landlords with multiple properties is whether to hold them through a limited company rather than personally. 

The headline tax rate for companies is currently 25% (for profits above £250,000), compared to 40% or 45% for higher-rate individual taxpayers. Companies can also still deduct mortgage interest in full.

However, incorporation isn't always a good option. 

Here's what to have in mind when considering it: 

• Property transfers into a company can trigger Stamp Duty Land Tax and Capital Gains Tax, unless specific reliefs apply
• Profit extraction through salary or dividends can create a second layer of tax
• Limited company buy-to-let mortgages often carry higher interest rates
• Limited company administration and compliance typically involve higher accountancy and running costs

The decision depends on your individual situation – on the number of properties you have, your other income, and your long-term plans. A qualified accountant who specialises in property can run the numbers for you before you commit.

🧠 Good to know: 

If you're starting from scratch and buying your first investment property, holding it in a company from day one avoids the transfer costs. Whether that's the right structure still depends on your goals, but it's a good idea to consider both options before you buy.

Selling a rental: Capital Gains Tax

Reducing Income Tax is only part of the picture. When you sell a rental property, you'll typically face Capital Gains Tax (CGT) on the gain. For 2026/27, the CGT annual exempt amount is £3,000 per person. Gains above that are taxed at 24% for residential property (for both basic-rate and higher-rate taxpayers, following the 2024 Budget changes).

Here are some ways to reduce your CGT bill:

• Claim eligible improvement costs by adding them to the property's base cost, which can reduce your taxable gain when you sell
• Check whether you qualify for Letting Relief, which is now only available in limited circumstances, typically when you lived in the property at the same time as your tenant
• Claim Private Residence Relief for any period during which the property was your main home
• Plan the timing of your sale carefully, as spreading a disposal across tax years may create additional tax planning opportunities

How ANNA helps with your rental tax admin

Reducing your rental tax bill starts with good record-keeping. The easier it is to track income, expenses, and tax obligations throughout the year, the less likely you are to miss deductions or face a stressful Self Assessment deadline.

ANNA combines a business account, bookkeeping, and tax tools in one place, helping landlords stay organised and MTD-compliant.

Here's what ANNA offers:

• A UK business account: Manage rental income and property-related expenses from a dedicated account designed for business finances
• Smart Auto Accountant: Sit back and relax as ANNA's Auto Accountant automatically categorises transactions, helping you keep accurate records and identify allowable expenses throughout the year
• Receipt capture and expense tracking: Store receipts digitally and keep supporting documents organised for tax purposes
• Real-time tax estimates: Get an ongoing view of your potential tax liability instead of waiting until the end of the tax year
• Free 2026/27 Self Assessment filing: Prepare and submit your Self Assessment tax return directly through ANNA, reducing paperwork and manual admin
• Accountant-friendly records: Export clear financial summaries and transaction data when you need to share information with your accountant
• Tax deadline reminders: Stay on top of key filing and payment dates to avoid unnecessary penalties and interest
• 24/7 expert support: Get help whenever you need it from ANNA's support team, whether you have questions about your account, bookkeeping, tax deadlines, or day-to-day financial admin

Register with ANNA today and take the stress out of managing rental property finances.