A very common thing I hear from clients is:
“I’m employed under PAYE, so I didn’t think I needed to file a Tax Return.”
This assumption causes more accidental non-compliance than almost anything else I see — particularly where someone owns one rental property alongside a full-time job.
If this sounds familiar, this guide will explain:
- why PAYE does not cover rental income
- when HMRC expect a Tax Return
- the situations that catch people out
- and what to do if you’re unsure
🎥 If you prefer to watch rather than read, this video explains why PAYE does not cover rental income and when HMRC still expect a Tax Return.
You can continue reading the full written guide below.
1. What PAYE Actually Covers (and What It Doesn’t)
PAYE is designed to tax Employment income only.
Your Employer:
- deducts Tax and National Insurance
- reports your salary to HMRC
- submits information through Payroll
However, PAYE does not cover:
- Rental income
- Property Profits or Losses
- Income from letting a second home
- Airbnb or short-term lets
- Income from inherited property
Any rental income you receive sits outside PAYE.
2. Why HMRC Still Expect a Tax Return
If you receive rental income, HMRC usually expect it to be declared on a Self Assessment Tax Return, even if:
- the property only makes a small profit
- the rent just covers the mortgage
- the property makes a loss
- you only own one property
- you are already fully taxed through PAYE
HMRC need visibility of the rental activity — PAYE does not give them that.
3. The Most Common PAYE Landlord Scenarios I See
This issue commonly affects people who:
- moved out of their former home and rented it
- inherited a property and kept tenants in place
- bought a buy-to-let while employed full-time
- rent out a property to help with living costs
- assumed their letting agent “handled the tax”
In most of these cases, the person was not trying to avoid Tax — they simply didn’t realise a Return was required.
4. “But I Didn’t Make a Profit” — Does That Matter?
Not in the way many people think.
Even if your rental property makes a loss, HMRC may still expect a Tax Return so that:
- the rental income is reported
- the loss is recorded correctly
- the loss can be carried forward to future years
This is a very common misunderstanding for PAYE taxpayers.
Even where a rental property makes a loss, a Tax Return may still be required, which I explain in more detail in my guide on Rental Property Losses – Do You Still Need a Tax Return?
5. What If HMRC Never Asked Me to File?
HMRC do not always issue a Tax Return automatically.
Not receiving a letter does not mean:
- everything is correct
- a Return was not required
- HMRC are unaware of the rental
HMRC increasingly rely on third-party data rather than waiting for people to register, which I explain in my guide on How HMRC Know You’re Renting Out Your Property
6. How HMRC Identify PAYE Taxpayers with Rental Income
HMRC now receive information from:
- letting agents
- mortgage lenders
- councils and licensing schemes
- rental platforms
- Land Registry data
Where rental activity exists but no Tax Return is filed, this creates a mismatch that can trigger contact from HMRC.
7. What Happens If You Should Have Filed but Didn’t?
If HMRC later identify undeclared rental income:
- they may issue a Nudge letter
- they may ask you to register for Self Assessment
- they may review earlier years
- Penalties and Interest can apply
In many cases, this can be resolved calmly if addressed early.
Many people assume everything is fine because HMRC never contacted them, which I cover in more detail in my guide on What it means if you never received a letter from HMRC (Blog coming soon)
8. What Should You Do If You’re Unsure?
If you’re employed under PAYE and own a rental property, it’s worth checking:
- whether a Tax Return was required
- whether rental income was reported correctly
- whether losses exist
- whether anything needs correcting
Ignoring it or assuming PAYE covers everything is what usually causes problems later.
Final Word
PAYE only taxes your employment income — it does not cover rental income.
If you’re employed and own a rental property, HMRC often still expect a Tax Return, even where profits are small or losses arise.
Unsure where you stand?
If you’re unsure whether you should have filed, getting clarity now is far easier than waiting for HMRC to contact you.
If you’d like professional help reviewing your position, you can book a paid diagnostic consultation with us to understand your next steps.