Section 24 Landlord Tax: 20% Credit, Costs and Thresholds

Section 24 landlord tax rules stop individual landlords deducting mortgage interest and other finance costs from rental income before tax. Instead, tax is calculated on the full rental profit and a flat 20% credit is applied afterwards. For basic rate taxpayers who stay in the basic band, the effect is broadly neutral. For higher and additional rate taxpayers, the change adds real money to the annual bill, because tax is paid at 40% or 45% on income that is only relieved at 20%.

What the Rule Actually Does

Before April 2017, an individual landlord treated mortgage interest like any other business expense: gross rent in, interest and other costs out, tax on the net figure. A landlord with £30,000 in rent and £12,000 in mortgage interest declared £18,000 of rental profit and paid tax on that.

The Finance (No. 2) Act 2015 phased that deduction out over four tax years. Only 75% of finance costs were deductible in 2017-18, 50% in 2018-19, and 25% in 2019-20. From 2020-21 onwards, no deduction is allowed at all.¹ In place of the deduction, HMRC gives a tax reducer worth 20% of your finance costs, applied after your income tax has been calculated on the full profit.

Who Section 24 Applies To

The restriction covers individuals who receive income from residential property, whether they live in the UK or abroad. A non-resident who owns a buy-to-let flat in Manchester is caught in the same way as a landlord living next door to their tenant. Partnerships made up of individuals, and trustees receiving residential rental income, are also within scope.¹

Two categories sit outside the rule. Limited companies paying corporation tax continue to deduct mortgage interest in full when calculating taxable rental profit; for companies, interest is handled under the loan relationship rules.² Commercial property is also unaffected, because the restriction bites only on income from dwellings.

What It Costs a Higher Rate Landlord

Take a landlord with a £45,000 salary and a rental property producing £20,000 of rent. Allowable non-finance expenses (repairs, insurance, agent fees) come to £5,000, and mortgage interest is £8,000.

Rental profit with no interest deduction: £20,000 minus £5,000 = £15,000
Total taxable income: £45,000 plus £15,000 = £60,000
Income tax after the £12,570 personal allowance: 20% on the first £37,700 (£7,540) plus 40% on the remaining £9,730 (£3,892), totalling £11,432
Section 24 credit: 20% of £8,000 = £1,600
Final tax bill: £11,432 minus £1,600 = £9,832

Under the old rules, the £8,000 of interest would have come off before tax, dropping total income to £52,000 and cutting the amount taxed at 40%. Section 24 costs this landlord £1,600 a year: they pay 40% on the interest and get only 20% back.³ The same mechanism can also push someone from the basic rate into the higher rate for the first time, because the profit figure that decides your band is now inflated by the interest you used to deduct.

How the 20% Credit Is Capped

The credit is not automatically 20% of every pound of interest. HMRC calculates it as 20% of the lowest of three amounts:³

Your finance costs for the year, plus any amounts carried forward from earlier years
Your property business profits, after any brought-forward losses
Your adjusted total income above the personal allowance, meaning total income minus savings income, dividend income, and the personal allowance

In most years the finance costs figure is smallest, and you get the full 20%. If your rental profit is thin or your overall income is low, the credit is limited to the smaller number. It can reduce your tax bill to nil, but it cannot turn into a refund.

When the credit is capped, the unused portion is not lost. It carries forward and joins the following year’s finance costs in the same three-figure test.³ That matters most for a year with heavy voids or a big repair bill that wipes out profit: the relief is deferred, not forfeited.

Which Borrowing Costs Count

The restriction reaches beyond the monthly interest on your buy-to-let mortgage. Any borrowing cost tied to the residential letting is a “cost of a dwelling-related loan,” including:¹

Mortgage interest, meaning the interest portion of the payment rather than capital repayment
Interest on other loans used to fund a deposit, buy furnishings, or pay for improvements
Arrangement and broker fees charged to set up the loan
Early repayment charges for paying off a mortgage ahead of schedule
Loan renewal fees on remortgages or term extensions
Foreign exchange losses on overseas mortgage payments

Most lenders issue an annual interest statement showing how much interest was paid in the tax year. Keep that with your loan documentation. The capital repayment portion of a mortgage payment is not a finance cost and does not feed the credit calculation at all.

The Knock-On Effects on Other Thresholds

Because your reported income is now higher than it used to be for the same underlying cash position, Section 24 can drag you across income thresholds that trigger other tax consequences.

Personal Allowance Taper

Once adjusted net income passes £100,000, the £12,570 personal allowance shrinks by £1 for every £2 above that line, disappearing entirely at £125,140.⁴ The effective marginal rate in that band is 60%, because you are losing allowance while paying 40% on the earnings. A landlord who used to sit below £100,000 after deducting interest can find themselves pushed into the taper zone by the un-deducted gross profit.

High Income Child Benefit Charge

If you or your partner claim Child Benefit, the charge starts once either of you has adjusted net income above £60,000 and fully claws the benefit back at £80,000.⁵ The inflated Section 24 income figure feeds directly into this calculation, and some landlords who were comfortably below the threshold now repay part or all of the benefit.

Scottish Taxpayers

Scottish income tax rates are set by the Scottish Parliament. For 2025-26 the Scottish higher rate is 42% and the top rate is 48%.⁶ The Section 24 credit stays at the UK basic rate of 20%. A Scottish higher rate landlord therefore pays 42% on rental profit that still includes the un-deducted interest, and receives 20% back, a 22-point gap compared with the 20-point gap for an English higher rate landlord.

Furnished Holiday Lets No Longer Escape

Until April 2025, properties meeting the Furnished Holiday Let occupancy conditions had their own tax regime: full deduction of finance costs, capital allowances on furniture, and access to CGT business reliefs. Structuring a rental as an FHL was one of the main ways landlords stepped around Section 24.

The Finance Act 2025 abolished the FHL regime from 6 April 2025.⁷ Holiday lets are now taxed the same as any other residential rental. Section 24 applies to their finance costs, capital allowances on new furnishings are gone (transitional rules protect items already in a pool before April 2025), and the CGT business reliefs no longer cover disposals after that date. If you were holding a holiday let on the assumption FHL status kept you outside Section 24, that shelter has closed.

Whether Moving Properties to a Company Helps

Companies are exempt, so incorporation is often floated as an answer. The interest saving inside the company can be real for a higher rate landlord with a sizeable portfolio, but the transfer itself is expensive.

Moving a personally-owned property to a company you control is a disposal for Capital Gains Tax. CGT is charged on the gain between original cost and market value at transfer, at 18% for the basic rate band and 24% above it.⁸ Section 162 incorporation relief can defer the gain when the whole property business is transferred as a going concern in exchange for shares. From April 2026, that relief applies automatically where the conditions are met unless you elect out.

The company then pays Stamp Duty Land Tax on the market value of each property, at the higher rates for additional dwellings. Those rates begin at 5% on the first £125,000 and rise in bands to 17% on amounts above £1.5 million.⁹ Non-UK resident companies pay an extra 2% on top. On a £300,000 property, SDLT alone can exceed £17,000. Corporation tax itself is 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between.¹⁰

Getting money out of the company is its own tax event. Salary triggers income tax and National Insurance; dividends avoid NI but attract dividend tax. Commercial mortgages for company-held property tend to price higher than personal buy-to-let deals. Incorporation is worth modelling with an accountant over a 10- to 15-year horizon, not just against next year’s Section 24 bill.

Losses and What to Watch on the Return

If your allowable non-finance expenses exceed rental income, you make a rental loss. That loss carries forward and is set only against future profits of the same property business, never against employment income or other earnings.¹¹ Multiple properties are treated as one business, so a loss on one automatically covers profit on another in the same year.

Stop letting entirely and accumulated losses are usually lost. They survive only if you restart letting within three years as part of the same business, which is worth thinking about before you sell your last rental.

Section 24 does not change filing deadlines, but it makes the return more sensitive to error. Gross profit and finance costs are entered separately and used by HMRC in two different calculations, so getting the split wrong can mean underpaying tax and picking up interest charges. The online self-assessment deadline is 31 January after the end of the tax year, with a £100 fixed penalty for a late return even when no tax is owed, and further penalties if it remains outstanding after six months.¹²

1
Legislation.gov.uk. Finance (No. 2) Act 2015 – Section 24
2
HMRC Internal Manual. PIM2052 – Deductions: Interest: Overview
3
GOV.UK. Tax Relief for Residential Landlords: How It’s Worked Out
4
GOV.UK. Income Tax Rates and Personal Allowances
5
GOV.UK. High Income Child Benefit Charge
6
Scottish Government. Scottish Income Tax 2025 to 2026 Factsheet
7
GOV.UK. Clarification on Abolition of the Furnished Holiday Lettings Tax Regime
8
GOV.UK. Capital Gains Tax: What You Pay It On, Rates and Allowances
9
GOV.UK. Higher Rates of Stamp Duty Land Tax
10
GOV.UK. Corporation Tax Rates, Expenses and Reliefs
11
GOV.UK. Work Out Your Rental Income When You Let Property
12
HMRC Internal Manual. Self Assessment: The Legal Framework – SALF208