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All, I wanted to pick the tax brains on here about the way income tax is calculated during the current tax year. I understand for 2017-8, you are still allowed to deduct 75% of finance/mortgage costs, so here are some theoretical numbers:
total rental income (net of agent fees, repair etc but before mortgage)= 60,000
mortgage cost = 15,000
total taxable income = 60,000 - 15,000 X 75% = 48,750
assuming personal allowance of 11,500, and a higher tax threshold at 45,000, and no other income sources:
total tax payable: (45,000 - 11,500) X 20% + (48,750 - 45,000) X 40% - 15,000 X 25% X 20% * = 7450
* this is deducting from total tax liability the capped 20% tax relief for the remaining 25% of mortgage cost
does this look correct?
Here is a Calculator from TMW ( The Mortgage Works ) showing you a breakdown year by year as Section 24 kicks in.
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Thanks for the link, unfortunately no access to excel for the time being so can't really play with it. If anyone else can take a look at my original calcs, I'd be grateful.
It looks correct to me.
This is quite a good example, as previously your rental profit would have been:
Rental income less allowable expenses: £60,000Less mortgage interest: £15,000Equals rental profit: £45,000
The rental profit above under the old rules, would have normally been within the basic rate tax band to the pound.
However, 2017/18 is the first of the 4 year phase in of Section 24, and your calculations appear correct.
Essentially, your rental profit in 20178/18 would be:
Rental income less allowable expenses: £60,000Less 75% of your mortgage interest: £11,250Equals rental profit: £48,750
This would then be taxed thus:
£11,500 @ 0% = £Zero£33,500 @ 20% = £6,700£3,750 @ 40% = £1,500Subtotal tax = £8,200
Subtotal tax above: £8,200Less reducer: (£750) (£15,000 x 25% (allowable element) x 20% (tax))Equals total tax owed: £7,450
(Note, that the above could result in payments on account falling due towards the following tax year)
Of course, there are multiple factors that could affect the above. One such example may be if you make AVC pension contributions, which could extend the basic rate 20% band, exposing less of your income to the 40% rate.
Hope that helps and best wishes,
RITA4Rent (Rental Income Tax Advisors)
Specialists in Landlord Taxation
Recommended tax advisors of the Residential Landlords Association
Follow us on Twitter @Rita4Rent
clients (at) rita4rent (dot) co (dot) uk
I get everything apart from the " REDUCER " ?
Can you explain please.
That's the tax relief at basic rate.
Some useful information here:Coutts Bank highlight BTL tax squeeze