A guide to the January 31 tax deadline for landlords

As the heady haze of Christmas and new year begins to fade and the month-long hangover that is January looms into view, there’s one thing lingering in the mind of every landlord; indeed, every self-employed individual throughout the UK – their tax return. 

With the tax year beginning and ending in April, you might believe that it can wait until spring. However, the online deadline for the 2018/2019 tax year is set for the stroke of midnight on 31 January 2020; a date which is now less than four weeks away. This is not only the final deadline for filing your return but the final deadline for paying any outstanding tax owed for the tax year ending 5 April 2019. Missing that deadline could have severe financial consequences.

The consensus has often been that tax is a process best left to accountants, but even if you do employ an accountant to take care of your taxes, being able to make sense of it all yourself can be quite empowering.

That said, tax can seem confusing. Here we’ll be breaking down the process and helping landlords who might never have had to fill in a self-assessment tax return before.

How do you navigate the potential pitfalls and ensure you’re paying the right amount instead of paying either more than your fair share or too little? Who knows, you might be able to get rid of your accountant after all!

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How does tax work for landlords?

Landlord tax is not as complicated as you might assume. As long as your rental income is higher than your expenses (so you make a profit) for every tax year, you must file your profits for the year so you can be taxed on them.

Profit made from your properties will be added to any other income you may have earned that year and this total amount will determine whether you pay 20 per cent on your profits (the basic rate) or 40 per cent (the higher rate).

The first £1,000 of income from property rental is tax-free and income must only be reported if it’s above £2,500. As for National Insurance (NI), you only pay if you are running a business and being a landlord is your main source of income. This is difficult to dispute if you own and rent out more than one property.

If you are just renting out a single property then that profit is exempt from NI, although you can make voluntary contributions, if you so desire.

Once you have worked out your total profits, as a landlord you must take the following steps:-

  • Before 5 October of the following year (exactly six months after 5 April, which marks the end of the tax year), you must inform HMRC that you have a source of income that hasn’t been taxed via form SA1, which can be found on the official HMRC website at gov.uk
  • If you want to complete your tax return the old fashioned way (by paper) or want HMRC to calculate your tax for you, you must file that paper return by 31 October or incur a £100 penalty
  • If you would prefer to file electronically (which we would always recommend) then you must do so by 31 January. So, if you started renting the property in September 2018, you must file their first electronic return and make their first payment on account by 31 January, 2020.

 

A guide to the January 31 tax deadline for landlords

 

Expenses explained

Deductible expenses can only represent expenses accrued by renting out the property and will include utility bills, decorating and repairs or maintenance, ground rent, legal fees, interest paid on any loans obtained in order to purchase the property and any other interest directly related to your business.

Expenses are, quite honestly, the reason why accountants can charge what they charge. If, however, you are fully aware of your expenses and have extensive landlord cover to back you up, then there is no reason why you shouldn’t be able to sort your own taxes.

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Reducing payments on account

Whilst they might seem like an unnecessary complication at the time, when you reach that final deadline on 31 January, if you’ve already made a payment on your account for that tax year then the burden will be alleviated somewhat. Think of it as buying peace of mind for yourself in advance.

A payment on account quite literally refers to self-employed individuals making tax payments onto their accounts based on their tax bill from the previous year. This payment is split across two payments, due in January and July of each year, in order to soften the blow somewhat by spreading the cost. It’s perhaps an easier pill to swallow if you view payment on account as a way of paying off a portion of your bill in advance.

Of course, the government is self-aware enough to know that the income of a typical self-employed person will fluctuate annually and this is certainly the case for landlords.

So, if you feel that your income this year is due to be lower than the last you can apply for a payment on account reduction either online or by filing form SA303.

The problem with reducing your payment on account, however, is that all you’re doing is putting off payment until later. This is perfectly fine if you are having a tough year and feel as though you’ll be in better financial shape at a later date, but it’s a decision that certainly shouldn’t be taken lightly.

Underpayments will also be subject to interest, so if you presume that you will be earning less this year only for your fortunes to turnaround, then your tax bill will increase in the long term. Conversely, if you overpay then you should automatically be sent a refund by HMRC. However, if you wish to speed up the refund process, then you can manually claim a tax refund via the official gov.uk website.

How much will I be charged?

Payment on account will generally be 50 per cent of your previous tax bill and it will be spread across two payments that need to be made by 31 January and 31 July.

How much you are charged will, of course, depend on your profits, which are whatever you make from renting the property minus any expenses.

As an example – if your tax bill for the 2019 – 2020 tax year was £3,000 and you made two payments on account last year, both of £900,

you would owe total tax of £2,700 by 31 January 2020. This total includes the balancing payment of £1,200 for the 2019 tax year and the first payment on account of £1,500 towards your 2020 bill. 

The second payment would also be £1,500 and would be due on 31 July 2020. This is obviously a heavily simplified example, but should hopefully give you some idea as to the kind of payments you’ll be expected to make.