How does the Section 24 mortgage interest restriction affect buy-to-let landlords?

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Section 24 of the Finance (No. 2) Act 2015, fully phased in since April 2020, fundamentally changed how individual buy-to-let landlords are taxed on mortgage interest, and it remains one of the most significant costs many landlords underestimate. **How it used to work (before Section 24)** Previously, landlords could deduct their full mortgage interest cost from rental income BEFORE calculating taxable profit, just like any other business expense -- a landlord with £15,000 rental income and £8,000 mortgage interest would previously have been taxed on only £7,000 of profit. **How it works now** Under the current rules, landlords can no longer deduct mortgage interest (or other finance costs, such as mortgage arrangement fees) when calculating their taxable rental profit -- instead, they are taxed on the FULL rental income (minus allowable non-finance expenses like agent fees, repairs, and insurance), and then receive a flat 20% tax credit based on their finance costs, applied after the tax calculation. **Why this hurts higher-rate taxpayers more** Because the credit is fixed at the basic rate (20%) regardless of your actual tax band, a higher-rate (40%) or additional-rate (45%) taxpayer effectively only gets 20p back in tax relief for every £1 of mortgage interest, rather than 40p or 45p -- this can significantly increase the tax bill for higher-rate landlords compared with the old system, and can even push some landlords who were previously basic-rate taxpayers into the higher-rate band, since their full rental income (not net of interest) is added to their other income first when assessing which tax band applies. **Worked example** A landlord earns £45,000 from employment and receives £20,000 rental income with £12,000 mortgage interest. Under the current rules, their taxable rental profit (ignoring other allowable expenses for simplicity) is the full £20,000, not £8,000 -- combined with their £45,000 salary, this pushes a significant amount of their income into the 40% higher-rate band. They then receive a 20% tax credit on the £12,000 finance cost (£2,400), but this credit does not fully offset the higher overall tax bill caused by being taxed on the gross rental figure rather than the net-of-interest figure, and does not help at all with the higher marginal rate now applying to some of their income. **Can landlords pay tax on a loss-making property?** Yes -- because tax is calculated on rental income minus non-finance expenses, a highly leveraged landlord with large mortgage interest costs relative to rental income can find they owe Income Tax even in a year where, after accounting for mortgage interest, they made little or no actual cash profit, since the interest is not deducted before the tax calculation, only credited afterwards at a flat 20%. **Why some landlords incorporate** Section 24 does not apply to companies -- limited companies holding buy-to-let property can still deduct mortgage interest as a normal business expense against Corporation Tax, which is why many landlords with larger portfolios have considered transferring properties into a limited company structure, though this can trigger Stamp Duty Land Tax and Capital Gains Tax on the transfer, so it needs careful modelling rather than being an automatic decision. **Practical tip** Model your actual after-tax cash position under Section 24 (gross rental income taxed, minus a 20% credit on finance costs) rather than assuming your old net-of-interest profit figure still reflects your tax position, especially if you are a higher-rate taxpayer or highly geared.

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