If you run your business through a limited company, you’ll need to decide how to take money out of it for personal use.
Many business owners choose a combination of salary and dividends. However, there may be another option worth considering if you run your business from home or from a property that you personally own.
In the right circumstances, your company may be able to pay you rent for using part of the property for business purposes.
This can be a tax-efficient way to extract profits, but there are some important tax rules to understand.
Why might paying rent be beneficial?
From the company’s perspective, rent can offer some attractive tax advantages.
Unlike dividends, which are paid from profits after Corporation Tax, rent paid by the company is generally deductible when calculating the company’s taxable profits.
This means the company may reduce its Corporation Tax bill.
There is another potential benefit too.
Unlike salary payments, rental payments are not normally subject to National Insurance contributions.
For many owner-managed businesses, this can make rent an attractive addition to their profit extraction strategy.
How is the rent taxed personally?
While the company may receive tax relief on the rent paid, the individual receiving the rent will normally need to declare it as property income.
The rental income forms part of the individual’s property rental business and is included on their Self Assessment tax return.
Any allowable expenses relating to the rental income can usually be deducted before arriving at the taxable profit.
Can the £1,000 property allowance be claimed?
Unfortunately, not usually.
Many company owners are surprised by this rule.
Where rent is paid by a close company to a director, shareholder or other participator in the company, the £1,000 property allowance is generally not available.
This means the rental income must normally be fully accounted for when calculating taxable profits.
What tax rates apply?
For the 2026/27 tax year, rental profits are taxed at the standard income tax rates where they are not covered by the personal allowance.
These rates are:
- 20% for basic rate taxpayers
- 40% for higher rate taxpayers
- 45% for additional rate taxpayers
However, significant changes are planned from 6 April 2027.
What’s changing from April 2027?
The Government has announced that separate property income tax rates will apply from 6 April 2027.
These rates will be two percentage points higher than the standard income tax rates.
For 2027/28, the proposed rates are:
- 22% basic property rate
- 42% higher property rate
- 47% additional property rate
In addition, the order in which income is taxed will change.
Under the proposed rules, the personal allowance will first be set against employment income, trading profits and pension income before being applied to property income and savings income.
As a result, some property owners could find themselves paying more tax on rental income than they do currently.
Is paying rent always the best option?
Not necessarily.
The most tax-efficient way to extract profits depends on a number of factors, including:
- The company’s profit levels
- Your existing income
- The amount of rent being charged
- Available allowances
- Future tax changes
What works well for one business owner may not be the best solution for another.
That’s why it’s important to review all available options before making a decision.
Should you review your profit extraction strategy?
With changes to property income taxation planned from April 2027, now could be a good time to review how you take money out of your company.
Salary, dividends, pension contributions and rent can all play a role in an effective profit extraction strategy.
If you run your business from home or from a property that you own, contact Jon or the team at Jon Davies Accountants.
We’ll help you assess your options and create a tax-efficient strategy that works for both you and your business.
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Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk