Rental yield calculator — methodology

The two yields, and why they share a denominator

rent collected  = annual rent × (52 − void weeks) ÷ 52
running costs   = agent's fee (a share of rent COLLECTED) + service charge
                  + ground rent + insurance + maintenance
profit          = rent collected − running costs

gross yield = annual rent ÷ property value
net yield   = profit      ÷ property value

Both are measured against what the property is worth, so the entire gap between them is the cost of ownership. Many calculators put the purchase price plus the buying costs under the net figure, which is defensible on its own terms and makes the two numbers non-comparable: the fall from one to the other is then partly costs and partly a bigger denominator, and the reader cannot tell how much of it is which. The buying costs are not discarded — they appear under the return on your own cash, where the money actually went.

The agent’s fee is charged on rent collected rather than rent advertised, because an agent takes nothing while the property is empty. Charging it on the annual figure overstates the cost by the fee percentage of the void every time, and makes a longer void look more expensive than it is.

The return on your own cash, which is not a yield

finance costs   = mortgage balance × interest rate        (interest-only)
cash invested   = property value + buying costs − mortgage

cash flow before tax = profit − finance costs
cash flow after tax  = cash flow before tax − income tax on the property

return on cash = cash flow after tax ÷ cash invested

A yield is a property of the asset and does not move when you borrow against it. This figure is a property of your position, and it is the one a purchase decision turns on. The page keeps the two apart and never calls this one a yield, because reporting a leveraged cash-on-cash return under the word “yield” is the single commonest error in this category and it always flatters the borrowed case.

When the mortgage covers the whole price and the buying costs there is no cash invested, and the page says there is no return to express rather than dividing by zero and reporting an infinite one.

The finance cost restriction, in the order the statute applies it

Since 6 April 2020 finance costs on a residential property let by an individual are not deductible from rental income (ITTOIA 2005 s.272A). Relief is given instead as a tax reducer at the basic rate, computed on the lowest of three figures (ITA 2007 s.274A and s.274AA):

relief base = min( finance costs,
                   property business profits,
                   adjusted total income )

reducer     = basic rate × relief base
liability   = income tax on (other income + property profit) − reducer

The profit the tax is charged on therefore includes the mortgage interest. That is the whole change, and its consequences run further than the bill: taxable income is higher by the interest, which can move a landlord into a higher band, start withdrawing their personal allowance above £100,000, or take them over a threshold for a charge this page does not model.

Adjusted total income is total income less savings and dividend income and less the allowances the individual is entitled to. This page has no savings or dividend input, so it is taken as the sum of the tax engine’s own band amounts — total income less the personal allowance actually available at that income. For a reader who also has savings interest or dividends the figure would be slightly high; it is very rarely the binding cap, and it is listed in the limitations.

Where the property profits cap binds — a landlord whose interest bill has overtaken their profit, which a rate rise alone can cause — part of the interest gets no relief at all in that year. HMRC carries the unrelieved amount forward against later profits of the same property business. This calculator does not carry it forward, in either direction, and says so beside the answer.

Why the reducer is read at one rate for every region

ITA 2007 s.274A gives the relief at the basic rate. The figure used here is read out of the rate schedule for England, Wales and Northern Ireland — currently 20.00% — rather than out of the Scottish schedule, and it is found by the name the rules files themselves use for that band rather than by a string typed into this page.

Income tax on the rental profit itself is devolved, and a Scottish landlord meets Scottish rates on it here, through the tax engine, exactly as they would on a salary. It is only the reducer that is taken at a single rate. That simplification is safe while the band of the same name carries the same rate in both schedules — which it does in every tax year this software models — and test/rentalYieldCalculator.test.tsx asserts it for every year and every region, so the day the two diverge is a failing build rather than a silently wrong answer for a Scottish landlord.

Why nothing here multiplies a profit by a tax rate

Every tax figure on the page is the income tax engine run twice and subtracted: once with the property profit in the reader’s income and once without it. That is the pattern tax-core prescribes, and it is the only way to get a figure that respects the statutory stacking order, the allowance allocation of ITA 2007 s.25(2) and the personal allowance taper — all three of which make the cost of a slice of income a property of the taxpayer rather than of the slice.

The comparison with the old treatment is a third run of the same engine, on the same landlord, with the interest deducted from the profit before it was declared and no reducer anywhere. On the calculator’s own property that costs a landlord earning £30,000 exactly £0.00 and one earning £60,000 £1,968.75 a year. Neither figure is a percentage of anything; both are the difference between two whole tax calculations.

The rate on the next pound, measured rather than read off the engine

computeTaxPosition returns a marginal rate, measured by a forward difference on earned income. Rental profit is non-savings non-dividend income, so unusually for this site the engine’s figure is at least on the right rate schedule — and it is still the wrong answer here, because it is computed before the tax reducer.

While property profits are the binding cap, another pound of profit brings a pound of previously unrelieved interest back into relief with it, so the tax on the next pound is the marginal rate less the basic rate. Once finance costs are the binding cap the reducer stops moving and the two figures agree again. The page therefore measures the next £100 through the whole of the arithmetic above, and shows the engine-shaped figure beside it whenever they differ.

The rent-rise figure is measured end to end for the same reason. Between a £10-a-month rise and the landlord’s pocket sit the void they still lose, the agent’s share of what is collected, and the tax — and no single rate accounts for all three.

Rates, thresholds and allowances

Thresholds are taxable income, after allowances. There is no National Insurance on rental profit from an ordinary property letting, so none of the National Insurance figures in the rules files are used by this page at all.

The published area figures, and the division they are not

The two numbers this calculator cannot check are the two you type: the rent and the property value. The optional panel in the breakdown is what they can be checked against — the Office for National Statistics’ median monthly rent and HM Land Registry’s average sale price, for whichever area you choose. Neither is used in any calculation on this page, neither is written into any field, and the panel shows nothing until you pick an area.

The two figures are deliberately not divided into a yield. It would be one line of arithmetic on a page about yield, and it would be wrong. ONS publishes a median rent — the middle of the rents in an area. Land Registry publishes a mix-adjusted average price, produced by a statistical model of a representative property rather than by taking a middle. One divided by the other is neither the median yield in the area nor the average of the yields in it, and it is the yield of no property that exists — while looking authoritative, because it is two official numbers and one division. Your own two figures describe one property and do divide, which is what the rest of this page is about.

Three gaps in the published data are the publishers’ rather than this page’s, and the panel names each where it bites. Northern Ireland has no rent figure for the latest two months. Scotland’s rents are reported for eighteen Broad Rental Market Areas, which span more than one council, while its prices are reported by council — so those areas carry a rent and no price, and nothing here apportions one into the other. And Land Registry runs about a month behind ONS, so the two halves are usually different months; both dates are shown rather than one standing for both.

The area is chosen from a list rather than looked up from a postcode. A UK-wide postcode lookup needs Northern Ireland postcode data, which carries separate commercial-licensing conditions this site does not hold. Both series are provisional and are restated as later data arrives. The rent series is official statistics in development, a lower status than the rest of the published figures this site uses. An area figure describes every property of its kind across a whole area and is not a valuation of any particular one.

Sources

• ONS — Price Index of Private Rents, UK: monthly price statisticsThe median monthly rent in the optional area panel. Official statistics in development, provisional, and used in no calculation on this page.
• HM Land Registry — UK House Price IndexThe average property price in the optional area panel. A mix-adjusted average from a statistical model, not a valuation, provisional, and used in no calculation on this page.
• gov.uk — Work out your rental income when you let propertyWhat counts as rental income, which expenses are allowable, and that property losses are carried forward against future profits of the same property business rather than set against other income.
• gov.uk — Tax relief for residential landlords: how it’s worked outThe finance cost restriction itself, and the three-way cap — finance costs, property business profits, and adjusted total income — that decides what the basic-rate reducer is computed on.
• HMRC Property Income Manual — PIM2054, finance costsHMRC’s own statement of the restriction, the carry-forward of unrelieved finance costs, and the statutory references in ITTOIA 2005 s.272A and ITA 2007 s.274A.
• gov.uk — Income tax rates and allowances: current and pastThe personal allowance, its taper, and the bands the property profit is stacked against. Also the source of the basic rate the reducer is given at.
• gov.scot — Scottish income tax rates and bandsIncome tax on rental profit is devolved, so a landlord living in Scotland meets these rates on it — wherever the property is.
• gov.uk — Change to tax rates for property, savings and dividend incomeThe separate rate schedule and separate place in the stacking order that property income takes from 6 April 2027. Outside every tax year this calculator offers.

A dated change this page does not model

From 6 April 2027 property income gets its own rate schedule, separate from the schedule it currently shares with employment and pension income, and its own place in the order income is taxed in — above other income, below savings interest and dividends. It was announced at Budget 2025 and set out in HMRC’s technical note, linked in the sources above.

No tax year this calculator offers reaches that date, so nothing it computes reflects the change, and the rates themselves are deliberately not reproduced here: they are not in any rules file this page can read, and a figure typed into copy is wrong from the moment it moves with nothing to catch it. What is recorded here is the date, the fact and the source. The same change is logged in packages/tax-core/VERIFICATION.md, which sets out what it breaks in the software rather than on the page.

Seven things this calculation does not model

• Reliefs from the purchase tax. The tax itself is calculated — Stamp Duty Land Tax, Land and Buildings Transaction Tax or Land Transaction Tax, with the surcharge on an additional property — for an ordinary purchase of one residential property. First-time buyer relief, replacement of a main residence and the refund that follows it, purchases by companies and trusts, multiple dwellings relief, mixed use, leases and linked transactions are not modelled. Each is listed beside the figure on the page, and the reader can substitute their own.
• Capital growth and capital gains tax. No house price assumption exists anywhere in the model, and nothing prices the tax on a sale. Residential property has its own capital gains rates and its own short reporting and payment window.
• Anything but an interest-only mortgage. The balance never changes and the rate holds for the year. A repayment mortgage also pays capital, which is not an expense and attracts no relief of any kind.
• Losses and unrelieved finance costs, in either direction. A property loss is carried forward against later profits of the same property business; so is interest that the profits cap denied relief to. Neither is carried in or out here, and both would reduce a later year’s bill.
• Any structure other than personal ownership. A limited company pays corporation tax, deducts its mortgage interest in full with no restriction, and taxes the money again on the way out. Joint ownership, furnished holiday lettings and rent-a-room relief each have their own rules and none is here.
• The rest of the reader’s tax position. No savings interest or dividends — which slightly overstates the adjusted total income cap above — no property allowance, no capital allowances, no replacement of domestic items relief, no pension contributions, no student loan repayments and no high income child benefit charge. The pension omission matters most: relief at source is one of the few things that genuinely reduces a landlord’s bill, so the tax here is too high for anyone relying on it.
• The tenancy. The rent is what the reader typed rather than what the property will let for, the void allowance is a guess about the future, and maintenance averages out over years rather than arriving evenly. Arrears, a tenant who will not leave, and a major works bill are all real and none of them is a percentage.