Answers · UK 2025/26

What is Section 24 and how does it affect buy-to-let mortgage interest relief?

Section 24 restricts landlords to claiming mortgage interest as a 20% tax credit rather than deducting it fully from rental income before calculating tax, meaning higher and additional rate taxpayers effectively lose part of their interest relief. This can significantly reduce after-tax profits for leveraged landlords, particularly those with high mortgage balances relative to rental income.

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Section 24 of the Finance Act, phased in between 2017 and 2020, fundamentally changed how mortgage interest is treated for individual buy-to-let landlords, and it remains one of the most significant factors in whether a leveraged rental property is genuinely profitable after tax. **How it works** Rather than deducting mortgage interest as a business expense BEFORE calculating your taxable rental profit (as used to be the case, and as still applies to limited company landlords), individual landlords must now declare the FULL rental income as taxable profit, then separately claim a tax credit worth only 20% of the mortgage interest paid -- regardless of whether you are a basic, higher or additional rate taxpayer. **Why this hurts higher-rate taxpayers most** For a basic-rate (20%) taxpayer, the 20% tax credit broadly matches the relief they would have got under the old system (since they were only claiming interest relief at their own 20% rate anyway). For higher-rate (40%) or additional-rate (45%) taxpayers, the 20% credit is worth significantly less than the tax they are actually paying on the additional taxable profit, effectively increasing their tax bill compared with the pre-2020 system. **It can push landlords into a higher tax band** Because the FULL rental income (not the profit after interest) counts toward your total taxable income for band purposes, a landlord who was previously a basic-rate taxpayer can find themselves pushed into the higher-rate band once their gross rental income (rather than net profit) is added to their other income -- even if their true cash profit after mortgage costs is modest. **Worked example** A higher-rate taxpayer landlord has £15,000 rental income and £8,000 mortgage interest. Under Section 24, taxable rental profit is the full £15,000 (no interest deduction at this stage), taxed at 40% = £6,000, then a 20% tax credit on the £8,000 interest is applied: £8,000 × 20% = £1,600 credit. Net tax due: £6,000 − £1,600 = £4,400. Compare this to their true cash profit of only £7,000 (£15,000 − £8,000 interest) -- their effective tax rate on true profit is over 60%, far higher than their nominal 40% rate. **Why some landlords incorporate** Section 24 does not apply to properties held within a limited company, since companies pay Corporation Tax (with full interest deductibility as a normal business expense) rather than personal Income Tax -- this has driven many landlords, particularly higher-rate taxpayers with significant mortgage debt, to consider transferring properties into a limited company structure, though this triggers its own costs (potential CGT, SDLT, and ongoing company administration). **Practical tip** Use the Buy-to-Let calculator to model your true after-tax cash return under Section 24 rules, particularly if you are a higher-rate taxpayer with substantial mortgage debt, since the headline rental yield can look far more attractive than the actual after-tax position.