Buy-to-Let Tax After Section 24: What Landlords Pay in 2026

Section 24 of the Finance (No. 2) Act 2015 fundamentally changed how buy-to-let landlords are taxed in England, Wales, and Scotland. Before the changes were phased in from 2017, landlords could deduct their full mortgage interest from rental income before calculating their tax bill. Now, that deduction has been replaced with a 20% basic rate tax credit — and for higher-rate taxpayers, the difference is enormous.

How the Old System Worked (Pre-2017)

Under the pre-2017 rules, the calculation was straightforward:

Taxable rental profit = Rental income − Allowable expenses − Mortgage interest

A landlord earning £14,400 per year in rent (£1,200/month) with £9,600 per year in mortgage interest (£800/month) and £2,000 in other expenses would calculate:

• Taxable profit: £14,400 − £9,600 − £2,000 = £2,800
• Tax at 40%: £1,120

How Section 24 Works Now

Under the current rules, mortgage interest cannot be deducted from rental income. Instead, you calculate your profit without the mortgage interest deduction, pay tax on the higher figure, then apply a 20% basic rate credit on the mortgage interest.

Step 1: Calculate profit excluding mortgage interest. Step 2: Pay income tax on that profit at your marginal rate. Step 3: Deduct a tax credit equal to 20% of the mortgage interest paid.

Using the same landlord — £14,400 rent, £9,600 mortgage interest, £2,000 other expenses:

Step 1: Profit = £14,400 − £2,000 = £12,400 Step 2: Tax at 40% on £12,400 = £4,960 Step 3: Less 20% credit on £9,600 mortgage interest = £1,920 Net tax bill: £4,960 − £1,920 = £3,040

That is £1,920 more tax per year than under the old system — on exactly the same rental income and outgoings. Over ten years, that is an additional £19,200 in tax.

A Detailed Worked Example: £1,200/Month Rent, £800/Month Mortgage

This is a realistic scenario for a standard buy-to-let in many parts of the UK.

Annual figures:

• Rental income: £14,400
• Mortgage interest: £9,600
• Letting agent fees (10%): £1,440
• Buildings insurance: £350
• Repairs and maintenance: £600
• Total deductible expenses (ex-mortgage): £2,390

In this example, the landlord moves from making a modest annual profit to making a loss after tax — despite the property generating positive cash flow before tax.

The Basic Rate Taxpayer

For a basic rate (20%) taxpayer, the impact is substantially different:

The basic rate taxpayer pays the same amount either way. The 20% tax credit perfectly offsets the removal of the deduction. Section 24 was specifically designed to affect higher-rate taxpayers.

The "Phantom Income" Problem

One of the most discussed consequences of Section 24 is that it can push landlords into a higher tax band even when they are not actually making more money.

Because rental income is now reported in full (before deducting mortgage interest), it adds more gross income to a landlord's self-assessment return. This can push total income above the basic rate band (£50,270 in 2026/27) even when actual cash profits are modest.

Example: A landlord earns £42,000 from employment and has a rental property generating £14,400 gross rent with £9,600 mortgage interest.

Under the old rules, taxable rental profit was £2,410 — total income £44,410, well within the basic rate band.

Under Section 24, taxable rental profit is £12,010 — total income £54,010. This pushes £3,740 into the 40% band. The resulting tax bill is higher than might be expected, even though the actual financial gain from the property has not changed.

Additional Rate Taxpayers

For those earning above £125,140 in 2026/27 (paying 45% additional rate tax), Section 24 is even more punishing:

Using the same £14,400 rent and £9,600 mortgage interest (with £2,390 other expenses):

• Tax at 45% on £12,010 profit: £5,404.50
• Less 20% credit: −£1,920
• Net tax: £3,484.50

This compares to a pre-2017 bill of £1,084.50 on the same income. The additional cost is £2,400 per year.

Limited Company Ownership: The Alternative

Since Section 24 only affects individuals, a number of landlords have transferred properties to limited companies or purchased new investment properties through a company structure.

Within a company, mortgage interest remains a deductible business expense. The company pays corporation tax — 25% for profits above £250,000 in 2026, with a small profits rate of 19% for profits under £50,000. After-company profits can then be extracted as dividends.

However, the transfer of a personally held property to a company is treated as a disposal for capital gains tax purposes, and Stamp Duty Land Tax (or LBTT in Scotland) is payable on the transfer at market value. For many landlords with large accumulated gains, this makes the switch prohibitively expensive.

New landlords building a portfolio from scratch are increasingly choosing the limited company route from the outset.

What Landlords Can Still Deduct

Despite Section 24, there remains a meaningful list of allowable expenses:

• Letting agent and management fees
• Property repairs and maintenance (not capital improvements)
• Buildings and contents insurance
• Ground rent and service charges
• Advertising costs
• Accountancy fees
• Council tax, gas, electricity, and water paid while the property is empty
• Professional cleaning between tenancies
• Mortgage arrangement fees (spread over the term of the deal)

Landlords with a property that is partly used as a home (a flat above a shop, or a room let within their own home under the Rent a Room scheme) face additional complexity and should take professional advice.

Planning for 2026 and Beyond

Section 24 is here to stay. There has been no indication from the current government of any intention to reverse it. Landlords facing unviable tax bills have broadly four options:

1. Increase rents — subject to market conditions and, in Scotland, the Private Housing (Tenancies) Act restrictions.
2. Reduce mortgage debt — overpaying reduces the interest cost and therefore the notional "phantom income."
3. Sell and reinvest via a company — expensive for existing owners but worth modelling.
4. Accept lower returns or exit — many landlords with single properties have chosen to sell, contributing to reduced private rental supply.

Understanding the precise impact on your own position requires a self-assessment calculation incorporating all your income sources. Using HMRC's SA105 supplementary pages carefully — and taking advice from an accountant familiar with property taxation — is strongly recommended.