Gross and net yield
Gross yield is a year's rent divided by the price. It is quick to work out and useful for comparing listings, but ignores every cost.
Net yield takes off running costs and empty periods first. It is a much better guide to what the property earns before mortgage interest and tax.
- Rent for a full year£15,600
- Gross yield£15,600 ÷ £250,0006.24%
- Less 2 empty weeks, 10% agent fee and £2,000 of costs−£4,100
- Net rent£11,500
Running costs to include
- Letting agent fees: about 10% to 15% of rent for full management, less for tenant-find only.
- Empty periods: two to four weeks a year between tenants is a common allowance.
- Landlord insurance: buildings and liability cover, often a few hundred pounds a year.
- Repairs and maintenance: boilers, appliances, decorating; many landlords budget 5% to 10% of rent.
- Safety checks: a yearly gas safety certificate, electrical checks every five years and an EPC.
- Service charge and ground rent: for leasehold flats, often £1,000 to £3,000 a year or more.
- Licensing: some councils require a licence for rented homes.
All of these are allowable expenses that reduce your taxable profit. Mortgage interest is treated differently.
A worked example
The same £250,000 flat, bought with a 25% deposit and a 5% interest-only mortgage of £187,500. The landlord earns £40,000 a year from a job.
| Amount | |
|---|---|
| Rent due | £15,600 |
| Empty weeks, agent and costs | −£4,100 |
| Taxable profit | £11,500 |
| Income Tax on that profit | −£2,546 |
| 20% credit for mortgage interest | +£1,875 |
| Mortgage interest | −£9,375 |
| Profit after tax | £1,454 |
A 6.24% gross yield becomes £1,454 a year after tax, about £121 a month. The cash put in was £80,500, so the return on cash is 1.8% before any rise in the property's value.
Tax and Section 24
Individual landlords cannot deduct mortgage interest from rental income. Since April 2020, under rules known as Section 24, you pay Income Tax on your profit before interest and then get a tax credit of 20% of the interest.
For a basic-rate taxpayer, that works out roughly the same as deducting the interest. For higher and additional-rate taxpayers it means paying more tax, sometimes on a property that makes no profit at all.
The credit is limited to 20% of the lowest of your finance costs, your property profit, and your income above the Personal Allowance. Any unused credit is carried forward to later years.
Announced: higher rates on property income
The government has announced separate Income Tax rates for property income from April 2027 of 22%, 42% and 47%, with relief for finance costs rising to 22%. They apply from 2027/28, so this calculator uses the 2026/27 rates.
Why your tax band matters
The same property gives very different results depending on the landlord's other income:
| Other income | Tax on rent | Profit after tax |
|---|---|---|
| £0 | £0 | £2,125 |
| £40,000 | £671 | £1,454 |
| £60,000 | £2,725 | −£600 |
The landlord earning £60,000 has £2,125 of cash left after costs and interest, but owes £2,725 in tax, so they lose £600 a year. That is Section 24 at work.
Return on the cash you put in
Yield is measured against the price. Your return is better measured against the cash you actually invested: deposit, Stamp Duty and buying costs.
- Cash put in
- £80,500
- Profit after tax
- £1,454
- Return on cash
- 1.8%
- Cash put in
- £268,000
- Profit after tax
- £8,954
- Return on cash
- 3.3%
A mortgage magnifies both gains and losses. When the mortgage rate is above the net yield, borrowing reduces your return; when it is below, borrowing increases it. Capital growth, which is not included here, is what makes many buy-to-let investments work.
The cost of buying
Buy-to-let purchases pay the higher rates of property tax:
| Where | Tax | Amount |
|---|---|---|
| England & NI | Stamp Duty with 5% surcharge | £15,000 |
| Scotland | LBTT plus 8% ADS | £22,100 |
| Wales | LTT higher rates | £14,950 |
Add legal fees, a survey and a mortgage arrangement fee, often £2,000 to £4,000 in total.
Buy-to-let mortgages
Buy-to-let lenders usually want a deposit of at least 25% and lend based on the rent rather than your salary. They check the interest cover ratio: the rent must be at least 125% of the mortgage interest at a stress rate, or 145% for higher-rate taxpayers.
At a 5.5% stress rate and 125% cover, £1,300 a month of rent supports a loan of about £226,900. At 145% cover it supports about £195,600. Most buy-to-let mortgages are interest-only, so the loan must be repaid when the property is sold or refinanced.
When rates rise
Mortgage interest is usually a landlord's biggest cost. On the £187,500 loan, each 1 point rise in rate adds £1,875 a year in interest. At 6% instead of 5%, the higher-rate landlord's loss grows from £600 to £2,100 a year.
Stress-test your numbers
Try the calculator at your expected remortgage rate, not just today's. A property that only works at a low fixed rate is a risk when the fix ends.
Personal or limited company?
Section 24 does not apply to companies. A company deducts mortgage interest in full and pays Corporation Tax at 19% to 25% on profits. But getting money out of the company means dividends or salary, which are taxed again, and company buy-to-let mortgages are often more expensive.
Moving properties you already own into a company is treated as a sale, so Capital Gains Tax and Stamp Duty can be due. Take advice from an accountant before deciding.
Selling and Capital Gains Tax
When you sell, the gain is taxed at 18% within your basic-rate band and 24% above it, after the £3,000 annual exempt amount. You can deduct buying and selling costs and the cost of improvements, but not repairs. You must report and pay within 60 days of completion.
Rules for landlords
- Protect any deposit in a government-approved scheme within 30 days.
- Carry out right-to-rent checks in England.
- Provide a gas safety certificate, electrical safety report and EPC.
- Fit smoke alarms and carbon monoxide alarms where required.
- In England, the Renters' Rights Act ends "no-fault" section 21 evictions and moves tenancies to rolling periodic agreements.
Scotland and Wales have their own tenancy systems and landlord registration rules.
Tax returns and records
- Every yearSelf Assessment
Rental income goes on your tax return, due online by 31 January after the tax year ends.
- April 2026Making Tax Digital starts
Landlords and sole traders with qualifying income over £50,000 keep digital records and send quarterly updates.
- April 2027Threshold falls to £30,000
More landlords join Making Tax Digital.
Up to £1,000 a year of property income is covered by the property allowance, and renting a room in your own home has a separate £7,500 Rent a Room allowance.
What is a good yield?
There is no single answer. Yields are usually higher in cheaper areas and lower where prices are high, such as London, where landlords often rely more on capital growth. As a rough check, compare your net yield with your mortgage rate: if the net yield is below the rate, the property will not pay for its own borrowing without rising rents or prices.
| Monthly rent | Gross yield |
|---|---|
| £1,000 | 4.8% |
| £1,250 | 6.0% |
| £1,500 | 7.2% |
| £1,750 | 8.4% |
Interest-only or repayment?
Most buy-to-let mortgages are interest-only: you pay only the interest and repay the loan when you sell or refinance. That keeps monthly costs low, but the debt never falls.
With a 25-year repayment mortgage on the same £187,500 loan at 5%, first-year interest falls slightly to about £9,287, but you also repay about £3,866 of capital. Your profit after tax is similar, about £1,524, but your cash flow becomes negative at about −£2,342, because capital repayments come out of your pocket and are not tax-deductible. The capital is not lost: it builds equity in the property.
Capital growth
Rental profit is only half the story. If the £250,000 flat rose in value by 3% a year, after 5 years it would be worth about £289,819, a rise of about £39,819. With a mortgage, that gain is on the whole property while your cash in was £80,500.
Prices can fall as well as rise, and a gain is only realised when you sell, after selling costs and Capital Gains Tax. Stamp Duty and your buying and selling costs are deducted from the gain when working out the tax.
Before you buy: a checklist
- Check achievable rents with local letting agents and current listings, not the seller's estimate.
- Run the numbers at a higher mortgage rate and with a month or two empty.
- Check the EPC rating, and budget for improvements if it is low.
- For leasehold flats, check the lease length, service charge history and any restrictions on letting.
- Check whether the council requires a licence for rented homes in that area.
- Make sure you have savings for repairs and empty periods.
- Decide on personal or company ownership before you buy, with advice.
Holiday lets, HMOs and furnished lets
Holiday lets. The special tax rules for furnished holiday lettings ended in April 2025. Holiday let profits are now taxed like other rental income, including the Section 24 restriction on mortgage interest.
Houses in multiple occupation (HMOs). Letting rooms to several unrelated tenants can raise the yield, but large HMOs need a licence, extra safety measures and more management, and running costs are higher.
Furnished lets. You can deduct the cost of replacing furniture, appliances and furnishings, but not the cost of furnishing the property for the first time.
Running costs ready reckoner
On rent of £1,300 a month, typical yearly costs might look like this:
| Cost | Basis | A year |
|---|---|---|
| Empty weeks | 2 weeks | £600 |
| Letting agent | 10% of rent collected | £1,500 |
| Landlord insurance | Typical policy | £400 |
| Repairs and maintenance | About 5% of rent | £780 |
| Safety certificates | Gas, electrical | £150 |
| Service charge and ground rent | Leasehold flat | £670 |
That adds up to £4,100, the figure used in the worked example. Your own costs may be quite different, especially for older houses or flats with high service charges, so use real quotes where you can.