Where a business is run through a personal or family company, the directors/shareholders will need to extracting profits if they are to be used personally. There are various ways in which this can be done, and popular options include paying a small salary and extracting profit and further profits as dividends.
However, where the business is run from home or from property owned by the directors/shareholders, a further option is for the company to pay rent. This can be advantageous.
Extracting profits as rent
Company’s position
The rent paid by the company is deductible in computing the company’s taxable profits, unlike dividends which are paid from post-tax profits. However, unlike salary payments, there is no National Insurance to pay on rental payments. Consequently, paying rent can be a tax-efficient way to extracting profits.
Individual’s position
The rental income received by the individual is taken into account in computing the profits of their property rental business for the year. However, as the company will usually be close and the individual is a participator in the company, the £1,000 property income allowance is not available.
The rental profits are included in the individual’s taxable income on which their tax liability for the year is calculated. For 2026/27 and earlier tax years, rental income is taxed at the normal income tax rates if it is not sheltered by the personal allowance – 20% where it falls in the basic rate band, 40% where it falls in the higher rate band and 45% where it falls in the additional rate band. However, this is to change from 6 April 2027. From that date, new property income tax rates apply which are two percentage points higher than the standard income tax rates. For 2027/28, the basic property rate is 22%, the higher property rate is 42% and the additional property rate is 47%. In a further twist, the ordering rules are changed from the same date so that the personal allowance is set against employment, trading and pension income before property and savings income.
