How is Airbnb income taxed?

With approximately 2.9 million Airbnb hosts across the world, it’s apparent that the holiday rental service continues to be a popular source of income for property owners everywhere. Whether you’ve recently listed a room or flat on the platform or are planning on entering the market in the near future, it pays to educate yourself about the taxes you’ll need to pay on any income you make.

Airbnb taxes can be confusing for hosts. Is the income the same as being self-employed and do you need to pay VAT? Not understanding the law won’t be seen as an excuse for paying the wrong amount of tax by HMRC, so it’s important that you get your accounts in order sooner rather than later.

Some Airbnb hosts may decide to use a basic accounting software package to help with company finances. However, for those who have multiple properties and who also employ staff, some hosts may also find it efficient to invest in a payroll system to help them to manage their staff remuneration. But while software can help you to make calculations and submit your tax return on time, you still need an awareness of all the rules and regulations you must comply with.

Income tax on Airbnb earnings

The money you make from renting out a property on Airbnb will be considered as part of your personal allowance. This means that you have up to £12,500 of earnings that are tax-free. Once you exceed this threshold, you’ll have to pay tax. If you have another form of income already that exceeds your personal allowance threshold, all of the money you make from Airbnb will be taxed.

The rate that you pay tax at currently could change once your Airbnb earnings are added to your total income. The basic rate of tax is 20%, but if your earnings increase to over £50,270, then you will be taxed at 40%. You’ll also need to bear VAT in mind if your Airbnb income comes to over £85,000. VAT is an extra 20% and is paid as well as income tax – make sure you’re VAT registered if your income does exceed the threshold.

If you’re thinking about trying Airbnb for a short period of time but the thought of calculating taxes is complicating matters, then remember that if your income for the year is under £1000, you don’t need to declare earnings to HMRC.

Airbnb tax relief

While the above tax information will be applicable to most Airbnb hosts, some will be able to claim tax relief if they meet certain conditions. Types of tax relief Airbnb hosts may be entitled to include:

Rent a Room Relief: If you’re renting a single room out in your own home rather than a separate property, then you might qualify for tax relief. Hosts who are approved by the scheme will have a tax-free allowance that’s separate from their main income, meaning you won’t have to pay tax on your Airbnb income until it hits £7,500.

Entrepreneur’s Relief: When you sell your property, you may be entitled to a 10% tax on capital gains rather than 28%.

Expenses: All businesses can claim back the tax on certain expenses related to their work. For Airbnb hosts, these may include:

• Energy costs and other utility bills
• Repairs and maintenance
• Cleaning costs
• Letting agent fees or Airbnb platform fees

However, you should note that these expenses must only be for your Airbnb, rather than personal costs. For example, you couldn’t claim tax relief on all of your energy bills if you’re renting out a room in your own home.

Filing your Airbnb tax return

Paying tax for your Airbnb income will mean filling out a self-assessment form, which can be found on HMRC’s website. Tax software makes the process easier, but some hosts will also hire an accountant to make sure all their books are in order. Information you need to keep a record of to make the process smoother includes:

• All the income you’ve earned during the tax year including but not limited to your Airbnb earnings
• Any expenses and fees you’ve paid
•  The dates you earned your income (for national insurance calculations)

Remember, if the property you’re hosting is in another country, you’ll need to read up on local tax rules and regulations. You’ll likely still need to pay tax to HMRC, but if the country your property is in hasn’t entered a tax treaty with the UK, it will be more difficult to avoid double taxation.