To illustrate with an example:
Sarah began renting out a property in September 2022 at £15,000, with permitted yearly expenses of £3,000. Her other earnings already utilize her personal tax-free allowance and the basic tax rate. Therefore, all rental income will be subject to the higher tax rate, which stands at 40% presently. Previously, she hadn’t filled out a self-assessment tax return.
What are her responsibilities?
By 5th October 2023:
Sarah is obligated to inform HMRC about her untaxed income source within six months from the close of the relevant tax year. Given that she began earning rental income profits during the tax year concluding on 5th April 2023, she must inform them no later than 5th October 2023. For this purpose, HMRC provides form SA1, which taxpayers can use to report their liabilities. This form is available on the Government website.
By 31st October 2023 (Optional):
Should Sarah prefer to submit a paper tax return or wish for HMRC to determine her tax obligation, she must turn in the 2022/23 paper tax return by this date. Submitting the paper return after this deadline will incur a £100 fine.
By 30th December 2023 (Optional):
If Sarah’s tax due amounts to less than £3,000 and she desires for it to be included in her PAYE code for the 2024/25 period, she either has to submit a paper return by 31st October 2023 or an electronic one by 30th December 2023.
By 31st January 2024:
In the event Sarah doesn’t submit a paper tax return by 31st October 2023, she is mandated to send in an electronic tax return by 31st January 2024. Failing to do so will result in a £100 penalty. However, note that some individuals (like those in politically sensitive positions) may not be permitted to file electronically. In such cases, a paper return may be required by this date.
Sarah’s Tax Obligations:
Presuming her income remains consistent until at least 5th April 2024, her tax responsibilities will be as follows:
Tax Year Tax due
2022/23 £2,800 (Profits to 05/04/23 7,000 @ 40%)
2023/24 £4,800 (Annual Profits of 12,000 @ 40%)
When is her tax due?
Is Sarah employed?
If Sarah has a job, her income tax is processed through the Pay As You Earn (PAYE) system. While HMRC often includes estimated amounts for rental income in PAYE codes, this approach might result in taxes being collected up to two years ahead of when it’s necessary. Consequently, we recommend not requesting HMRC to incorporate such estimates into your code.
For the 2022/23 tax year, Sarah’s tax obligation will amount to £2,800. As long as she submits her 2023 self-assessment tax return by 30th December 2023, this due amount can be incorporated into her 2024/25 code since it’s under £3,000. This arrangement implies that this liability would be collected in increments throughout the year concluding on 5th April 2025, rather than in the year concluding on 5th April 2023, had HMRC incorporated a projected income in the 2022/23 PAYE code.
Any self-assessment liability exceeding £3,000 for a specific tax year can’t be added to the PAYE code. Thus, Sarah won’t be permitted to integrate her 2023/24 liability of £4,800 into her 2025/26 code. This means that come 31st January 2025, she will owe £7,200, which coincides with the year the £2,800 liability for 2022/23 is being deducted via her code. Hence, it’s crucial to set aside funds to cover such liabilities.
If Sarah is not employed or she has a liability of more than £3,000:
Should the net obligation be below £1,000 or constitute less than 20% of the total tax combined with Class 4 national insurance (before deducting any tax), then these liabilities are payable on the 31st of January after the tax year concludes, and no advance payments are required. In such a scenario, if Sarah qualifies under the 20% condition, she’d owe £2,800 on 31st January 2024 and £4,800 on 31st January 2025.
If neither of these criteria is fulfilled, advance payments for the subsequent tax year are needed. These consist of half of the prior year’s income tax and Class 4 NIC, due on the 31st of January of the next tax year, and the remaining half is payable six months later on the 31st of July. If the liability for the upcoming year rises, the balance will be due on the subsequent 31st of January, and the advance payments will amplify for the year after.
Conversely, if the obligation for the next year decreases, there’d be a refund of the excess, and the advance payments for the subsequent year would decrease. A request can be submitted to decrease advance payments if one anticipates a drop in liabilities, for instance if there’s no more rental income. Over-reducing payments incur interest on the excessive claim reduction. In the first year when advance payments apply, one essentially pays the tax equivalent to one and a half years simultaneously. Using Sarah’s financial responsibilities provides a clear illustration of this concept.
| Date Due | Tax Year | Tax Liability
(No PAYE) |
Tax Liability
(2022/23 in PAYE Code) |
| 2022/23 Total Liability | 2,800 | – | |
| 2023/24 1st POA (1/2 x 2,800) | 1,400 | – | |
| 31st January 2024 | 4,200 | – | |
| 2023/24 2nd POA (1/2 x 2,800) | 1,400 | – | |
| 31st July 2024 | 1,400 | – | |
| 2023/24 balance (4800 – (2 x 1400) | 2,000 | 4,800 | |
| 2024/25 1st POA (1/2 x 4,800) | 2,400 | 2,400 | |
| 31st January 2025 | 4,400 | 7.200 | |
| 2024/25 2nd POA (1/2 x 4,800) | 2,400 | 2,400 | |
| 31st July 2025 | 2,400 | 2,400 |
Should Sarah’s income and tax obligations remain consistent, her annual payments would consistently be £2,400 due on both the 31st of January and the 31st of July, given that her advance payments align with her liabilities. While this scenario is rare in real-life circumstances, if her income remains relatively stable each year, the payments made in January and July are expected to be comparable after the initial three-year period.
What if you are late?
A fixed, non-refundable penalty of £100 is imposed if the return isn’t submitted by its deadline, which is typically the 31st of January after the tax year concludes. If there’s a justifiable reason for the delay, penalties may be dismissed. Delays surpassing three months incur a daily penalty of £10 for each subsequent day the return remains late, capped at 90 days.
Should the return exceed a six-month delay, an additional penalty of either £300 or 5% of the tax due (whichever is greater) will be levied. For returns submitted more than twelve months past the deadline (meaning by 31st January, 22 months post the tax year’s end), an extra penalty of £300 or 5% of the tax due (whichever is greater) is charged, on top of the penalty set for the preceding 31st July. In grave cases, penalties can skyrocket to 100% of the tax owed.
Late payments accrue interest. Additionally, a 5% penalty is applied if the prior tax year’s liability isn’t settled within 30 days post the 31st of January of the following year. If payment isn’t made by the subsequent 31st July, an added 5% penalty is imposed. Lastly, if the tax remains unpaid by the next 31st January, a third 5% penalty is levied.
As these penalties are costly it is vital that all taxpayers ensure that their returns are filed on time.
What you do if you cannot pay?
Consider reaching out to HMRC to discuss a potential arrangement. They currently offer a Business Payment Support Service, and you can contact them at 0300 200 3835.
Records you need to keep and Making Tax Digital
Currently, you must maintain records that correctly reflect your income and expenditures. Starting from 6th April 2026, if you have a gross rental income surpassing £50,000, you will be mandated to keep digital records and submit reports on your income and expenses to HMRC every quarter, within a month of the quarter’s conclusion. From April 2027, this requirement will extend to those earning a gross rental income above £30,000. Despite the shift to quarterly reporting, HMRC has confirmed that the semi-annual payment schedule will remain unchanged.
Capital Gains Tax (CGT)
For UK Residents: When selling most UK residential properties, you must submit a return and settle any capital gains tax within 60 days of finalizing the sale. It might be essential to approximate the capital gains tax rate, which can later be adjusted in the self-assessment return or by modifying the capital gains tax return. However, for non-residential sales, only declare them in your self-assessment Income Tax return.
For Non-UK Residents: For any UK property sale, whether residential or commercial, you need to file a return and pay the corresponding capital gains tax within 60 days of the sale’s completion. You might need to estimate the capital gains tax rate, and adjustments can be made in the self-assessment return or by updating the capital gains tax return.
Remember, failure to submit the return within the 60-day window after the sale’s completion will result in late submission penalties.
DISCLAIMER
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice that takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi, and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.