How to pay tax on Airbnb income
Airbnb has become a popular way to earn some extra cash in the past few years. Instead of renting out whole houses or even turning houses into HMOs, many are now opting to run Airbnb businesses instead.
But with many now having multiple income streams in addition to their main job, understanding how to pay the right amount of tax can be complicated. It’s best to hire an accountant to assist and ensure your self-assessments are filled out correctly, or that you’re paying the correct amount of corporate tax, if you’re running a limited company.
Let’s delve into the logistics of paying tax on your Airbnb income.
Is income from your Airbnb business taxable?
Yes, although you will be subject to some relief. As with any type of income, it’s taxable. However, how you pay tax will have a lot to do with if you’re renting a property as a whole, or a room in a property you also live in.
In 2016, the UK government increased the tax-free threshold for furnished holiday lets to £7,500, as part of the Rent A Room Relief scheme. This means that if you’re renting a room out in your private residence, you can earn up to £7,500 before you need to start paying tax on this income. Different rules apply if your Airbnb is an investment property. This is where things get a bit more complicated, and an accountant is best placed to assist.
Do you need to charge VAT on your lettings?
You only need to worry about this when your income exceeds £85,000 per year. Then you will need to become VAT registered and file VAT returns to HMRC. You’ll need to charge 20% VAT because Airbnb falls under the definition of ‘holiday accommodation’.
Residential income is exempt from VAT in the UK. But Airbnb income isn’t.
Do Airbnb landlords get any tax advantages?
There are a number of tax advantages for Airbnb landlords compared to typical buy-to-let landlords. As long as you meet the conditions of the definitions ‘furnished holiday let’. For example:
- Any Airbnb profits are treated as ‘Earned’ self-employed income. Typically income from a buy-to-let does not qualify as this. This means you can make a bigger tax-free contribution to your pension scheme.
- Capital allowances – these will be available for furniture, fixtures and equipment. For typical buy-to-let landlords this is not the case.
Who pays the council tax?
When renting out your Airbnb, be it a holiday home or investment property, and it’s available to let for less than 140 days per year, you will need to pay council tax instead of business rates.
Airbnb hosting in a buy-to-let property
If you are hosting your Airbnb guests in a separate house/flat that isn’t within your residence, you unfortunately don’t qualify for a tax-free allowance of £7,500.
You will then pay tax on any rental profits. For example, if you earn £20,000 from your Airbnb in tax year 1, but spend £5,000 on allowable business expenses, such as gas, electricity, insurance and repairs) you’ll only pay tax on the £15,000 profit you made.
An investment property VS renting a room in your house
Put simply, the way you run your Airbnb business determines how you pay tax on your earnings. If you’re renting a room in your main property, you will be allowed a variety of exceptions and allowances. On the other hand, if you’re renting out a separate investment property, you’ll be taxed as a business owner.