Section 24 Tax Explained for Landlords

Section 24 changed how mortgage interest is treated for individual landlords who own rental property in their own name. Instead of deducting mortgage interest from your rental profit before working out tax, you deduct it from your final tax bill instead, at a fixed 20% rate. For a basic rate taxpayer this makes little practical difference. For a higher or additional rate taxpayer, it can mean paying tax on income you never actually kept.

This guide explains what changed, works through examples at different tax bands, and looks at when incorporating into a limited company is worth exploring further. It does not tell you what to do with your own portfolio: that depends on your numbers, your plans, and proper advice.

For an interactive illustration, try our free landlord tax calculator (not tax advice).

What Section 24 changed

Before the rules changed, a landlord who owned property personally could deduct mortgage interest as a business expense, in full, before arriving at a taxable profit figure. If your rent was £15,000 and your mortgage interest was £8,000, your taxable profit was £7,000 (before other allowable expenses), and you paid income tax on that £7,000 at your marginal rate.

Section 24 of the Finance (No. 2) Act 2015 phased this out between the 2017-18 and 2020-21 tax years. Since April 2020, individual landlords can no longer deduct mortgage interest, or other finance costs such as arrangement fees, from rental income at all. Instead, you calculate tax on the full rental profit as if the interest had never been paid, then claim a tax reduction equal to 20% of the finance costs, applied directly against your tax bill.

The rule applies to landlords who own residential property personally, in joint names, or through most types of partnership. It does not apply to furnished holiday lets in the years they still qualified for that treatment, and it does not apply to landlords who own property through a limited company, because a company pays corporation tax on profit after deducting interest as a normal cost of the business. That difference is the main reason incorporation comes up so often in this conversation, and we cover it properly in our limited company buy to let guide.

Basic vs higher rate impact

Whether Section 24 costs you anything real depends on which income tax band you fall into once your full rental profit, not just your cash profit after interest, is added to your other income.

For a basic rate taxpayer (income tax bands for 2026/27: personal allowance up to £12,570, then 20% up to £50,270), the 20% tax reduction on finance costs broadly matches the 20% rate you would have paid anyway, so the change is close to neutral in cash terms. The main risk is that adding back the full rental profit, rather than the smaller profit after interest, can push your total income over the higher rate threshold and into the 40% band, even though your actual cash profit has not changed.

For a higher rate taxpayer (40% on income between £50,271 and £125,140), the mismatch is real. You pay 40% tax on the full rental profit but only get a 20% credit back for the finance costs, so you are effectively paying 40% tax on income you handed straight to your mortgage lender as interest. In a highly leveraged property with a thin margin, this can mean a landlord pays tax that exceeds their actual cash profit for the year.

For an additional rate taxpayer (45% above £125,140), the gap is wider still, and Section 24 is one of the reasons some portfolio landlords in this band end up looking closely at incorporation for future purchases, or at reducing borrowing on personally held property.

From 6 April 2027, a further change lands on top of this. Under the Finance Act 2026, individual landlords in England and Northern Ireland will pay separate, higher property income tax rates: 22% basic rate, 42% higher rate and 47% additional rate on rental profit, two percentage points above the equivalent general income tax rates. Scotland and Wales are expected to set their own rates for property income. This widens the Section 24 gap further for higher and additional rate landlords from that date, and is worth factoring into any incorporation decision you are weighing up now rather than treating as a problem for 2027.

Worked examples

These figures are illustrative, using round numbers and 2026/27 thresholds, to show the mechanism rather than to model any specific property. Always check current rates and bands on GOV.UK before relying on a real calculation.

Basic rate example. Rent £12,000, mortgage interest £5,000, other allowable expenses £1,000. Taxable profit is £11,000 (rent minus expenses, interest excluded). Tax at 20% is £2,200, less a 20% credit on the £5,000 interest (£1,000), giving a net tax bill of £1,200. Cash profit after interest and expenses was £6,000, so the landlord keeps the large majority of it.

Higher rate example. Same property, but the landlord's total income (salary plus rental profit) now falls in the higher rate band. Taxable profit is still £11,000. Tax at 40% is £4,400, less the same £1,000 credit, giving a net tax bill of £3,400. Cash profit after interest and expenses is still £6,000, so tax now takes over half of the actual cash the property generated, even though the arithmetic profit figure has not changed.

Highly geared, higher rate example. A more highly leveraged property makes the effect starker. Rent £14,400, mortgage interest £9,600, other allowable expenses £800. Taxable profit is £13,600. At the higher rate, tax before any relief is £5,440, less a 20% credit on the £9,600 interest (£1,920), giving a net tax bill of £3,520. Cash profit after interest and expenses is only £4,000, so tax absorbs the majority of the actual cash the property produced that year. This is the scenario landlords describe when they say a property is "profitable on paper but loses money in real life."

The pattern holds at any scale: the more leveraged the property and the higher your tax band, the bigger the gap between arithmetic profit and cash profit becomes. It also means two landlords with identical properties and identical rents can end up with very different tax bills purely because of their personal tax band and how much borrowing sits against the property. Our tax on rental income guide walks through the full Self Assessment calculation, including other allowable expenses, in more detail.

Incorporation questions

Because a limited company deducts mortgage interest as a normal business expense before paying corporation tax, incorporating removes the Section 24 mismatch entirely for new purchases. That is a genuine advantage, but it is not automatically the right answer, for several reasons:

• You usually cannot simply move existing property into a company without cost. Transferring a personally held property to a company you control is normally treated as a sale for both Stamp Duty Land Tax and Capital Gains Tax purposes, even though no cash changes hands, which can create a large tax bill before you save anything.
• Company buy-to-let mortgages typically cost more. Rates and fees on limited company (SPV) mortgages tend to run higher than equivalent personal-name products, which erodes some of the tax saving. See our limited company buy to let mortgage guide for how lenders assess these.
• Getting money out of the company has its own tax cost. Profits belong to the company until you extract them as salary or dividends, both of which are taxed again in your hands, so the comparison has to look at the whole picture, not just corporation tax versus income tax.

There is also a mortgage affordability angle that catches some landlords by surprise. Lenders know Section 24 makes higher rate personal-name borrowing riskier, so they typically stress-test personal applications at a tougher rental cover ratio (often 145%) than basic rate or limited company applications (typically 125%). That means the tax treatment does not just affect your annual bill, it can also reduce how much you are able to borrow in the first place. Our how buy-to-let mortgages work guide covers rental cover in more detail.

For landlords buying new property, especially higher rate taxpayers with several properties and no immediate need to draw the profit out personally, incorporation is worth modelling properly, ideally before you exchange rather than after. For a single lightly geared property held by a basic rate taxpayer, it often is not, because the mortgage cost premium and the cost of running a company can outweigh a tax saving that was close to neutral in the first place.

Not tax advice

This is a genuinely complex area where the right answer depends on your personal tax position, your borrowing, your plans to sell or hold, and how you need to use the income. Section 24, the incoming property income tax rates, and the costs of incorporating all interact with each other in ways a general guide cannot model for your specific portfolio. Speak to an accountant who works with landlords before making a structural decision, particularly before transferring any property you already own.

How Property HQ helps

Property HQ connects your Open Banking feeds, categorises rent and mortgage interest by property, and hands your accountant a clean schedule at year end, so working out the real impact of Section 24 on your return is a lookup rather than a reconstruction project.

Disclaimer

This guide is general information for UK landlords, not legal, tax or mortgage advice. Check GOV.UK, HMRC or a qualified adviser for your situation.