Section 24 Explained: How Mortgage Interest Relief Changed for Landlords

Section 24 of the Finance (No.2) Act 2015 fundamentally changed how UK landlords are taxed on mortgage interest. Since April 2020, mortgage interest is no longer a deductible expense — instead, you receive a basic-rate (20%) tax credit. For higher-rate taxpayers this is the single biggest cause of "I'm earning more rent and paying more tax but my profit hasn't moved" frustration. This guide walks through the mechanics, the maths, the workarounds, and the cases where each workaround is worth the cost.

How it worked before

Before Section 24, you deducted mortgage interest from your rental income before calculating tax. If you earned £12,000 in rent and paid £7,000 in mortgage interest, you were taxed on £5,000. A higher-rate taxpayer paid 40% on that £5,000, which is £2,000 — a clean, straightforward calculation that landlords had relied on since the BTL market formed in the late 1990s.

The system worked because mortgage interest was treated like any other allowable expense — repairs, insurance, agent fees. It came off rental income before tax was calculated, so you only paid tax on what was genuinely your profit.

How it works now

Now you're taxed on the full £12,000 of rental income (minus other allowable expenses, but not mortgage interest). You then receive a 20% tax credit on the £7,000 interest — a £1,400 credit against your tax bill.

So the same example becomes: £12,000 rental income at 40% = £4,800 tax. Minus £1,400 credit = £3,400 tax bill. The headline rental "profit" on paper is £12,000 (since interest isn't deducted) — but you've actually only kept £4,600 after tax and interest. A basic-rate taxpayer in the same position pays £2,400 minus £1,400 = £1,000 — exactly what they'd have paid under the old system.

Who gets hit hardest?

Basic-rate taxpayers are largely unaffected — the 20% credit matches their tax rate. The change costs them nothing on the rental side directly, though it can still bite indirectly via Personal Allowance taper.

Higher-rate (40%) and additional-rate (45%) taxpayers pay significantly more. A higher-rate taxpayer in the example above pays £4,800 in tax on the rental income but only receives £1,400 back as a credit — a net £3,400 bill versus £2,000 under the old rules. That's a £1,400 increase on the same £5,000 of real economic profit.

The Personal Allowance trap

Section 24 has a second-order effect that catches a lot of landlords by surprise. Your "adjusted net income" for Personal Allowance taper purposes uses the gross rental income figure (no interest deduction), not the post-credit figure. Cross £100,000 and you start losing £1 of your £12,570 Personal Allowance for every £2 of income above the threshold. If your day job pays £85,000 and your gross rental is £20,000, you're now over £100k and starting to lose your allowance — even though your real combined income after interest might be well under that.

The effective marginal rate in the £100,000–£125,140 band is 60% (40% income tax + 20% from the disappearing Personal Allowance). For landlords pushed into that band purely by the Section 24 grossing-up, this is the most punishing bracket in the UK income tax code.

Strategies to consider

• Incorporate: Transfer properties to a limited company where mortgage interest is still fully deductible. The headline math is compelling — companies pay 19–25% Corporation Tax (depending on profits), which can be lower than higher-rate income tax even after the dividend tax that gets you the money out. But: incorporating triggers Stamp Duty Land Tax (SDLT) on each property at the company purchase rate (which includes the 5% additional dwelling surcharge), Capital Gains Tax on each property's gain since you bought it, and adds yearly Companies House filing costs. SDLT alone can wipe out 5+ years of tax saving.
• Incorporation Relief (s162): If you can demonstrate that your portfolio is run as a business — typically meaning 25+ hours per week of management time, separate accounts, and clear processes — you may qualify for s162 Incorporation Relief which rolls the CGT into the company's base cost. SDLT is unaffected. This is fact-sensitive; HMRC scrutinises Ramsay-style cases carefully and a tax adviser is essential.
• Pay down debt: Reducing your mortgage reduces the impact of Section 24. Every £10,000 of capital paid down at 5% interest saves £500/year of interest, which means £200 less Section 24 hit at higher rate. Compare this against the post-tax return on alternative investments before redirecting cashflow this way — paying down a 5% mortgage is equivalent to a roughly 8.3% pre-tax return for a higher-rate taxpayer, which is competitive.
• Spousal transfer: If your spouse is a basic-rate taxpayer, transferring some or all of the property to them via Form 17 (jointly-owned) or full transfer (singly-owned) can shift income into a lower band. CGT and SDLT consequences depend on whether the property has a mortgage, but spouse-to-spouse transfers are generally CGT-neutral.
• Maximise other expenses: Ensure you're claiming every allowable expense to reduce your taxable profit. Repairs (not improvements), insurance, agent fees, accountancy, mileage, mobile phone share, home-office allowance, replacement-of-domestic-items relief — these all still come off income normally.
• Review your portfolio: Properties with high loan-to-value ratios are most affected by Section 24. A property at 75% LTV and 5% interest generates the maximum tax pain per pound of equity. It may be worth selling the most-leveraged underperformer, paying down debt on the rest, and ending up with a leaner but more cash-generative portfolio.
• Move to commercial property: Section 24 only applies to residential lettings. Commercial rentals (offices, retail, industrial) still permit full mortgage interest deduction. This is a big shift in strategy and skill set, not a tweak.

The maths in detail

Take a higher-rate taxpayer with three properties, total rent £36,000, total interest £20,000, other expenses £4,000.

• Taxable rental "profit" under Section 24: £36,000 − £4,000 = £32,000
• Tax at 40%: £12,800
• 20% credit on £20,000 interest: £4,000
• Net tax bill on rental: £8,800
• Real profit kept: £36,000 − £20,000 − £4,000 − £8,800 = £3,200

Compare to the old system: same gross profit £12,000, taxed at 40% = £4,800, real profit kept = £7,200. Section 24 has roughly halved the after-tax return.

Track the impact

Tendmere's free tax-relief calculator shows your position both before and after the mortgage interest credit, so you can see the real impact of Section 24 on each property. Inside the app, the per-property profit figures show net of credit so you know which properties are still pulling their weight and which are running near break-even after tax.

The MTD ITSA angle

From April 2026, Making Tax Digital for Income Tax Self Assessment requires quarterly digital submissions for landlords with combined self-employment + property income above £50,000 (£30,000 from April 2027, £20,000 from April 2028). Section 24 mechanics don't change under MTD, but the quarterly cadence means the disconnect between gross rental income and real profit is visible four times a year, not once. Plan for the cashflow rhythm — HMRC's quarterly figures will look much higher than your bank statement says, because the interest hasn't been netted off.

Should you incorporate?

The honest rule of thumb: if you have 5+ properties, are firmly in the higher-rate band, plan to hold long-term, and have liquid funds or remortgage capacity to cover SDLT — incorporation can pay back in 5–7 years. Below that profile, the costs usually outweigh the savings.

Don't incorporate based on a YouTube comparison; book one hour with a tax adviser who specialises in landlord work and run your actual numbers. The wrong answer here can cost £20,000+ in irreversible SDLT and CGT.

Related guides

• Landlord allowable expenses — the full guide
• Making Tax Digital for landlords (pillar)
• Free tax relief calculator

This article is for general guidance only. Section 24 interactions with incorporation, spousal transfers, and CGT are highly fact-sensitive — your accountant or tax adviser should run the numbers for your specific situation before any irreversible decision.