How much rental income do you need to replace your salary in retirement?
A rental portfolio pays a gross yield and delivers a net income, and the gap between them is wider than most projections allow. Voids, maintenance, letting fees, insurance, the finance-cost restriction and Income Tax all sit between the two, and a headline 6% yield commonly nets under 3% once they are counted.
- The restriction: mortgage interest is a 20% tax reducer, not a deduction from profit.
- The leakage: voids, maintenance, letting fees and insurance before any tax.
- The tax: rental profit is taxed at your marginal rate, on top of your other income.
- The comparison: a salary carries a pension, sick pay and no capital risk.
Tom's brother-in-law has four flats and describes them as replacing a salary. On the numbers they replace about 40% of one, and the difference is almost entirely tax and the finance-cost restriction.
01 The finance-cost restriction
Since 2020, mortgage interest on a residential let is not deductible from rental profit. Instead it produces a basic-rate tax reducer worth 20% of the interest. For a basic-rate taxpayer that is roughly equivalent to the old treatment; for a higher-rate taxpayer it is not.
The consequence is that taxable rental profit is calculated before interest, so a higher-rate landlord can pay tax on income they never received. A property yielding £14,000 of rent with £9,000 of interest has £14,000 less other costs as taxable profit, and only £1,800 of relief against it.
That single rule is why leveraged buy-to-let is a materially different proposition from what it was a decade ago, and why the arithmetic has to be run on your own marginal rate rather than on a generic yield.
Source: Work out your rental income
02 What leaks out before tax
Voids are the first. A property let 11 months in 12 loses 8% of gross rent, and a portfolio that assumes full occupancy is assuming away the most predictable cost there is.
Then maintenance, which is lumpy and unavoidable: boilers, roofs, redecoration between tenancies, and the compliance costs of gas safety, electrical inspection and energy performance. A common planning figure is 1% of property value a year, and it is a floor rather than a ceiling on an older property.
Letting and management fees take 10% to 15% of rent where an agent is used, and insurance, ground rent and service charges take more. Before any tax at all, a 6% gross yield is frequently a 3.5% to 4% net one.
Source: Renting out your property
03 The tax stacks on top of everything else
Rental profit is added to your other income and taxed at your marginal rate. In retirement, someone drawing a pension and receiving rent can find the rent taxed at 40% because the pension has used the basic-rate band — so the property income is worth less to them than to a lower-earning owner.
It can also drag other things with it. Rental profit counts toward adjusted net income, so it contributes to the personal allowance taper above £100,000 and to the High Income Child Benefit Charge where relevant.
In Scotland the marginal rates above the personal allowance differ, so the same rent is worth a different amount depending on where the landlord lives rather than where the property is.
04 The comparison with a salary is not like for like
A salary comes with an employer pension contribution, statutory sick pay, holiday pay and no capital at risk. Rental income comes with none of those, plus the capital tied up in the property and the concentration risk of holding one asset class in one country.
It also comes with work. Managing property is a job, whether done personally or supervised through an agent, and describing it as passive income understates both the time and the decisions involved.
The honest comparison is between the net rental income after everything above and the salary net of tax, adjusted for the employer pension contribution the salary carries and the property does not.
Source: Stamp Duty Land Tax
05 Sizing a portfolio realistically
Work from net rather than gross. Take the achievable rent, deduct 8% for voids, 10% to 15% for management, 1% of value for maintenance, and the actual insurance and compliance costs. Then apply your marginal rate to the profit before interest, and subtract the 20% interest reducer.
The resulting figure is what one property produces. Divide the income you need by it, and the answer is the number of properties — which is usually more than people expect and requires more capital than a pension would need to produce the same income.
Then check the marginal rate on the last property, because a portfolio large enough to replace a salary frequently pushes its owner into the higher or additional band. The final property in a portfolio is the least profitable one, and that is worth knowing before buying it.
Shows: the net income from a let property after voids, costs, tax and the finance-cost restriction. Ignores: capital growth, purchase costs, Capital Gains Tax on eventual sale, and the time it takes to manage.
On the defaults above, the worked example shows £1,560 a year. That is 11% of the rent reaching you. Taxable profit is £10,600 because interest is not deducted from it.
Source: Tax when you sell property
The number that changes people's minds is not the yield, it is the taxable profit. Since 2020 mortgage interest is a 20% tax reducer rather than a deduction, so a higher-rate landlord pays tax calculated on rent they never kept. Run your own property through that calculation before deciding whether it replaces a salary — and then look at the last property in the portfolio specifically, because by the time you own enough to live on you are usually paying 40% on the rent from the final one. That property is doing the most work for the least return.
FAQ
Can I deduct my mortgage interest from rental profit?
No, not since 2020. Interest produces a basic-rate tax reducer worth 20% of it instead. Taxable profit is calculated before interest, so a higher-rate landlord can be taxed on income the mortgage consumed.
What net yield should I assume?
Well below the gross figure. Voids of around 8%, management of 10% to 15%, maintenance of about 1% of value and compliance costs typically take a 6% gross yield to under 4% before any tax at all.
Is rental income taxed on top of my pension?
Yes. It is added to your other income and taxed at your marginal rate, so a pension that has already used the basic-rate band leaves the rent taxed at 40%. It also counts toward adjusted net income for the personal allowance taper.
How many properties replace a salary?
More than the gross yield suggests, and the last one earns least because the portfolio has usually pushed its owner into a higher band by then. Size it from net income at your own marginal rate rather than from a headline yield.
Sources
Regulator references
- Work out your rental income · HM Revenue and Customs · 2025Which costs are deductible, including the finance-cost restriction.Last verified: 2026-09-07
- Renting out your property · GOV.UK · 2025The landlord obligations that sit behind the net-yield arithmetic.Last verified: 2026-09-07
- Income Tax rates and Personal Allowances · GOV.UK · 2025The band boundaries every figure in this post is calculated against.Last verified: 2026-09-07
- Stamp Duty Land Tax · GOV.UK · 2025The bands and the additional-property surcharge used in the example.Last verified: 2026-09-07
- Tax when you sell property · GOV.UK · 2025Reporting deadlines and reliefs on a residential property disposal.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.