Section 24 Mortgage Interest Restriction: A Full Worked Example (2026/27)

What changed and why it matters

Before April 2017, individual landlords deducted mortgage interest as a normal expense against rental income, just like any other cost of running the letting business. Since the phased introduction of Section 24 (fully in effect from the 2020/21 tax year), individual landlords instead calculate their taxable rental profit as if no mortgage interest had been paid at all, and then receive a flat 20% tax credit based on the actual interest paid, applied after the tax calculation.

Worked example: a higher-rate taxpayer landlord

Consider a landlord who is already a higher-rate taxpayer from their main employment, with a single buy-to-let property generating:

• Rental income: £14,000 a year
• Mortgage interest: £6,000 a year
• Other allowable expenses (letting agent fees, repairs, insurance): £2,000 a year

Step 1 — calculate taxable rental profit (mortgage interest is NOT deducted):

Taxable rental profit = £14,000 − £2,000 (other expenses only) = £12,000

This £12,000 is added to the landlord's other income and taxed at their marginal rate. Because they are already a higher-rate taxpayer, this £12,000 is taxed at 40%:

Tax on rental profit before credit = 40% × £12,000 = £4,800

Step 2 — apply the 20% tax credit on the mortgage interest:

Tax credit = 20% × £6,000 = £1,200

Step 3 — net tax due on the rental business:

£4,800 − £1,200 = £3,600

Comparing this to the old (pre-2017) system

Under the old rules, mortgage interest would have been deducted before calculating taxable profit:

Old taxable rental profit = £14,000 − £2,000 − £6,000 (interest deducted) = £6,000

Tax at 40% = 40% × £6,000 = £2,400

The landlord pays £1,200 more tax a year under Section 24 than they would have under the old rules (£3,600 versus £2,400) — exactly the gap between the 40% relief they would have received on the interest as a deduction, and the 20% credit they now receive instead (20 percentage points × £6,000 = £1,200).

Why this can push a landlord into a higher band unexpectedly

Notice that the taxable rental profit under Section 24 (£12,000) is double the real cash profit the landlord actually receives after paying the mortgage and other expenses (£14,000 − £6,000 − £2,000 = £6,000 cash profit). If this landlord's other income were close to the £50,270 higher-rate threshold, the inflated £12,000 taxable rental figure — rather than the real £6,000 cash profit — is what counts towards crossing into the higher-rate band, potentially triggering 40% tax on income that, in cash terms, barely breaks even once the mortgage is serviced.

Basic-rate taxpayer comparison

A basic-rate taxpayer with the same figures would calculate tax at 20% on the £12,000 taxable profit (£2,400), then receive the same £1,200 tax credit, leaving £1,200 net tax due — identical to what they would have paid under the old system (20% × £6,000 = £1,200 deducted-profit basis). This is why Section 24 is often described as neutral for basic-rate taxpayers but punitive for higher and additional-rate taxpayers, and can even convert a basic-rate taxpayer into a higher-rate one purely because of the interest add-back effect described above.

Common mitigation strategies

• Incorporation: transferring the portfolio into a limited company restores full interest deductibility against Corporation Tax, but usually triggers Capital Gains Tax and Stamp Duty Land Tax on the transfer, so the upfront cost needs to be weighed against the ongoing saving.
• Reducing borrowing: overpaying the mortgage where possible reduces the interest bill directly, shrinking the add-back effect.
• Pension contributions: contributing to a pension reduces adjusted net income, which can help avoid the inflated rental profit figure pushing a landlord over a tax band threshold.