Section 24 for Landlords: How the Mortgage Interest Restriction Actually Works (with worked examples)

Section 24 is the single biggest tax change UK landlords have faced this century. Since April 2020 you can no longer deduct mortgage interest as a rental expense — instead you receive a 20% basic-rate tax credit. For higher-rate taxpayers, the effective cost of borrowing has roughly doubled. This guide walks through exactly how the rules work, with worked examples at each tax band, so you can see what Section 24 actually does to your bottom line.

What is Section 24?

Section 24 of the Finance (No. 2) Act 2015 restricts the income tax relief individual landlords can claim on residential mortgage interest. It applies to:

• Individuals who own residential rental property personally
• Partnerships that include individuals
• Most trusts

It does not apply to:

• Limited companies (which pay Corporation Tax and still deduct mortgage interest as a business expense)
• Furnished Holiday Lettings — though the FHL regime itself was abolished from April 2025, so FHLs are now standard property businesses subject to Section 24
• Commercial property let by individuals (interest still fully deductible)

Pre-2017 vs post-April 2020 treatment

Under the old rules (pre-April 2017), a landlord's tax was calculated like this:

1. Rental income
2. Minus allowable expenses (including 100% of mortgage interest)
3. Equals taxable rental profit
4. Add to other income, then tax at your marginal rate

Under the new rules (from April 2020), the calculation looks like this:

1. Rental income
2. Minus allowable expenses (excluding mortgage interest — interest is no longer deductible)
3. Equals taxable rental profit (higher than under the old rules)
4. Add to other income, calculate income tax at marginal rates
5. Subtract a 20% tax credit on the year's finance costs (capped at the lower of finance costs, rental profit, or unused personal allowance + other income)

The phase-in (2017–2020)

HMRC phased Section 24 in over four tax years, gradually shifting from full deduction to full restriction:

What counts as a "finance cost"?

The 20% tax credit applies to a wider set of costs than just mortgage interest. Finance costs include:

• Interest on a buy-to-let mortgage on a residential rental property
• Interest on personal loans used to buy or improve a rental property
• Interest on overdrafts used for the rental business
• Mortgage arrangement fees, broker fees and discharge fees (amortised across the mortgage term if material)
• A proportion of life insurance premiums where the policy is required as a condition of the mortgage

What still is deductible as a normal expense:

• Letting agent fees, professional fees, legal fees not related to acquiring property
• Repairs and maintenance
• Building and contents insurance
• Council tax and utilities during void periods
• Mileage to inspect or carry out work on the property

For a full list see our UK landlord tax deductions guide.

Worked Example 1 — Basic-rate landlord

Old rules (pre-2017):

• Rental profit: £12,000 − £4,000 (interest) − £2,000 (other) = £6,000
• Total income: £25,000 + £6,000 = £31,000
• Tax on rental profit at 20%: £1,200

New rules (2020+):

• Rental profit (no interest deduction): £12,000 − £2,000 = £10,000
• Total income: £25,000 + £10,000 = £35,000 (still all basic-rate)
• Income tax on rental profit at 20%: £2,000
• Less 20% finance cost credit (20% × £4,000): −£800
• Net tax on rental: £1,200

Verdict: Basic-rate taxpayers come out neutral. The 20% credit exactly offsets the 20% tax on added-back interest.

Worked Example 2 — Higher-rate landlord

Old rules (pre-2017):

• Rental profit: £30,000 − £14,000 − £4,000 = £12,000
• Total income: £55,000 + £12,000 = £67,000 (all rental in 40% band)
• Tax on rental profit at 40%: £4,800

New rules (2020+):

• Rental profit (no interest deduction): £30,000 − £4,000 = £26,000
• Total income: £55,000 + £26,000 = £81,000 (all rental in 40% band)
• Income tax on rental profit at 40%: £10,400
• Less 20% finance cost credit (20% × £14,000): −£2,800
• Net tax on rental: £7,600

Verdict: The higher-rate landlord pays £2,800 more tax under Section 24 — the difference between 40% relief (which they used to get) and the 20% credit they now get on £14,000 of interest.

Worked Example 3 — Additional-rate landlord with band-pushing

Old rules (pre-2017):

• Rental profit: £80,000 − £40,000 − £10,000 = £30,000
• Total income: £80,000 + £30,000 = £110,000 (in personal allowance taper zone)
• Rental profit taxed at 40%: £12,000 (rough — ignoring taper for simplicity)

New rules (2020+):

• Rental profit (no interest deduction): £80,000 − £10,000 = £70,000
• Total reported income: £80,000 + £70,000 = £150,000 — pushes through £125,140 additional-rate threshold
• Income tax on rental at marginal rates: roughly £28,000–£30,000 (some at 40%, some at 45%, full personal allowance lost above £125,140)
• Less 20% finance cost credit (20% × £40,000): −£8,000
• Net tax on rental: £20,000+

Verdict: The additional-rate landlord pays roughly £8,000+ more in tax, plus loses their full personal allowance (worth around £5,000 in additional tax). For some highly-leveraged portfolios, post-tax cashflow can go from profit to loss after Section 24 bites.

When does incorporation make sense?

Because Section 24 doesn't apply to limited companies, many higher-rate landlords have considered moving their portfolio into an SPV (Special Purpose Vehicle) limited company. The arithmetic depends on several variables:

• Your marginal tax rate. Section 24 only hurts higher-rate and additional-rate taxpayers. Basic-rate landlords gain nothing from incorporating.
• Leverage. The more mortgage interest you have, the more Section 24 hurts and the more incorporation helps.
• Whether you extract profits. Inside a limited company, profits are taxed at 19–25% Corporation Tax. But if you take dividends, you pay dividend tax on top. Incorporation helps most where you reinvest rather than withdraw.
• Cost of transfer. Moving existing property into a Ltd Co triggers SDLT, capital gains tax and refinancing costs — these can be substantial.
• Mortgage rates. Limited company BTL rates are typically 0.5–1.5% higher than personal BTL rates, which eats into the saving.

For most landlords, the rough rule of thumb is: incorporation often makes sense above 4–5 mortgaged properties for a higher-rate taxpayer who plans to grow the portfolio and not extract dividends. But the maths is portfolio-specific — see our Ltd vs personal BTL comparison for a fuller analysis, and take professional tax advice before acting.

Other strategies for managing Section 24 impact

Transfer to a lower-earning spouse

If your spouse pays basic-rate tax, transferring all or part of a property's beneficial ownership (via Form 17 declaration) can move the rental income — and the Section 24 pain — into their tax band. Basic-rate landlords are neutral under Section 24.

Repay capital rather than refinance

Under Section 24, every £1 of interest creates a 20% tax credit but pushes more profit into higher-rate tax. Paying down the mortgage reduces this drag. For higher-rate taxpayers, the "effective" return on capital repayment can be significantly higher than headline mortgage rate suggests.

Use the property allowance carefully

The first £1,000 of rental income is tax-free under the property allowance. If your gross rents are very low, this might be a simpler route than full Self Assessment — but it's not relevant for typical landlords.

Defer through carry-forward

If your 20% credit can't be fully used in a tax year (because rental profit is too low), it carries forward indefinitely. So even loss-making years still bank credit for future use.

Section 24 and MTD ITSA

From April 2026, landlords above the £50,000 threshold must report quarterly under Making Tax Digital for Income Tax (MTD ITSA). Section 24 is unchanged by MTD — but the reporting cadence is. Quarterly updates report gross interest costs; the Final Declaration applies the 20% credit at year end.

Common Section 24 mistakes

"It only applies to higher-rate landlords"

The rule applies to all individual landlords. Basic-rate landlords are roughly tax-neutral but the calculation still changes (interest is added back, then 20% credit applied).

"It doesn't apply to my second home"

If it's let out as a residential property, it's in scope. Holiday lets (now ex-FHL) are in scope too.

"I'll just claim the interest as personal mortgage relief"

There is no other route to get more than 20% relief on residential rental finance costs as an individual. The credit is the only mechanism.

"My limited company doesn't have to think about Section 24"

Correct — but Ltd Co landlords still need to factor in Corporation Tax (19–25%) and dividend tax on extracted profits. The all-in tax cost can still be higher than people expect.

How OwnProperly Helps

OwnProperly tracks rental income and mortgage interest at the property level, so you always know your true taxable position under Section 24 — not the misleading pre-2017 figure. The dashboard shows real cash profit alongside taxable profit, making it easy to see when Section 24 is eroding your returns and where action might be worth taking. For MTD ITSA, finance costs are automatically separated into the right HMRC category for quarterly submissions.

Related reading: BTL stress test explained, How to analyse a buy-to-let deal.

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