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If you own residential rental property in your own name and have a mortgage on it, Section 24 is the piece of tax legislation that has the greatest impact on your tax bill. Introduced by the Finance (No. 2) Act 2015 and fully in force since April 2020, it fundamentally changed the way individual landlords receive relief on their mortgage interest, and for many, it has significantly increased the amount of tax they pay on the same rental income. This page explains what Section 24 is, how it works, who it affects, and what your options are.
Section 24 refers to provisions in the Finance (No. 2) Act 2015 that abolished the ability of individual landlords to deduct mortgage interest and other finance costs from their rental income when calculating their taxable profit. In its place, landlords now receive a basic rate tax reduction, a credit against their tax bill worth 20% of their qualifying finance costs. The change was phased in gradually between the 2017/18 and 2019/20 tax years and has applied in full since April 2020.
The policy rationale offered by the government at the time was that the old system gave higher-rate taxpaying landlords a more generous tax advantage than basic rate taxpayers and that this contributed to house price inflation by making leveraged property investment disproportionately attractive. Whatever one thinks of that argument, the practical effect on landlords has been substantial and understanding the rules is now essential for anyone letting residential property in their own name.
Under the old rules, mortgage interest was treated like any other allowable business expense. You deducted it from your rental income before calculating your taxable profit, which meant you received relief at your marginal rate of tax. A higher-rate taxpayer received 40% relief on their mortgage interest; an additional rate taxpayer received 45%. The profit figure you were taxed on was a reasonable reflection of your actual economic position after financing costs.
Under Section 24, that deduction no longer exists. Your taxable rental profit is calculated without any deduction for mortgage interest, which means it is higher than your actual cash profit. You then receive a tax reduction worth 20% of your finance costs, but that reduction is worth the same regardless of whether you pay tax at 20%, 40%, or 45%. For basic rate taxpayers, the outcome is broadly unchanged. For higher and additional rate taxpayers, the difference between what they used to receive and what they receive now represents a real and permanent increase in their tax liability.
The finance cost tax reduction is equal to 20% of the lowest of three figures: your qualifying finance costs for the tax year, your property business profits for the tax year, and your adjusted total income for the tax year above your personal allowance. The reason it is capped at the lowest of these three figures is to prevent the reduction from exceeding the tax you actually owe on your property income.
Where the full finance costs cannot be used in a given year, because your property profits or total income are insufficient, the unused amount is not lost. It is carried forward to the following tax year and added to that year’s finance costs when calculating the reduction. This carry-forward must be actively tracked and claimed in your self-assessment return; it does not happen automatically.
The numbers make the impact of Section 24 concrete. Suppose you have rental income of £22,000, allowable expenses (excluding finance costs) of £3,000, and mortgage interest of £11,000. Your only other income is a salary of £50,000.
Your taxable rental profit is £22,000 minus £3,000, giving £19,000. Your total income is £50,000 plus £19,000, giving £69,000. After your personal allowance of £12,570, your taxable income is £56,430. The basic rate band covers income up to £50,270 (after the personal allowance), so £37,700 is taxed at 20% and £18,730 is taxed at 40%. Your income tax before the finance cost reduction is (£37,700 × 20%) plus (£18,730 × 40%), giving £7,540 plus £7,492, a total of £15,032.
You then apply the finance cost tax reduction. The lowest of your finance costs (£11,000), your property profits (£19,000), and your adjusted total income above the personal allowance (£56,430) is £11,000. Your tax reduction is 20% of £11,000, which is £2,200. Your final tax bill for the year is £15,032 minus £2,200, giving £12,832.
Under the old rules, you would have deducted the £11,000 mortgage interest from your rental income, reducing your taxable rental profit to £8,000 and your total income to £58,000. The tax saving from the deduction would have been calculated at your marginal rate, in this case, a mixture of basic and higher rate. The direct Section 24 cost in this example is the difference between 40% relief on the portion of interest that falls in the higher rate band and the 20% reduction you actually receive. For many landlords with similar profiles, this runs to several thousand pounds per year.
One of the most significant, and least discussed, consequences of Section 24 is its effect on adjusted net income. Because mortgage interest is no longer deducted from rental income, your total taxable income is higher than your actual economic income. This matters for a number of reasons that go well beyond the rental tax calculation itself.
If your adjusted net income exceeds £100,000, your personal allowance begins to taper at a rate of £1 for every £2 of income above that threshold. By the time your income reaches £125,140, your personal allowance is gone entirely. The effective marginal tax rate in this band is 60%, and Section 24 can push landlords into it who would not otherwise be there. A landlord with a salary of £88,000 and rental income of £18,000 (with £12,000 of mortgage interest) might previously have had an adjusted net income of £94,000, below the taper threshold.
Under Section 24, their adjusted net income is £106,000, and they lose £3,000 of personal allowance, creating an additional tax cost of £1,200 that has nothing to do with their actual rental profit.
The same issue arises in relation to the High Income Child Benefit Charge, which applies where adjusted net income exceeds £60,000. Pension annual allowance tapering, student loan repayments, and entitlement to certain tax credits can all be similarly affected. These secondary costs are often overlooked but can be just as significant as the direct Section 24 impact, and they should always be factored into any assessment of a landlord’s overall tax position.
Section 24 applies to individual landlords letting residential property in the UK, and to partnerships where the partners are individuals. It does not apply to companies; a limited company that owns residential rental property can still deduct mortgage interest as a business expense in the normal way, paying corporation tax only on its net profit after finance costs.
The restriction is also specific to residential property; landlords letting commercial premises are unaffected and can continue to deduct finance costs in full.
A point to note is that the previous Section 24 exemption for furnished holiday lettings has been removed from April 2025. A landlord who previously leased furnished holiday accommodation will now be caught by the normal landlord rules for rental accommodation and will be liable to the full Section 24 restriction.
For landlords with larger portfolios or higher marginal tax rates, transferring properties into a limited company is often the most tax-efficient long-term response to Section 24. A company pays corporation tax, currently 19% for profits up to £50,000, rising to 25% for profits above £250,000, and can deduct mortgage interest in full before calculating its taxable profit. For a highly leveraged portfolio, the difference in tax between personal and corporate ownership can be very substantial indeed.
However, incorporation is not a simple or cost-free solution. Transferring properties from personal ownership to a company is treated as a disposal for capital gains tax purposes, which can trigger a significant CGT liability depending on how much the properties have increased in value since purchase. Stamp duty land tax is also payable on the transfer, calculated on the market value of the properties. The decision to incorporate therefore requires a careful analysis of the one-off costs against the ongoing tax savings, taking into account the size of the portfolio, the level of mortgage debt, the base costs of the properties, and the landlord’s long-term intentions.
For some landlords, the ongoing Section 24 tax drag will outweigh the one-off costs of incorporation within a relatively short period. For others, particularly those with low mortgage balances, properties standing at large gains, or plans to sell in the near future, the numbers may not stack up. There is no universal answer, and the right decision depends entirely on individual circumstances.
Incorporation is not the only option available to landlords affected by Section 24. Depending on your circumstances, there are a number of other strategies that may help to manage the impact.
Transferring a share of the property to a spouse or civil partner who pays tax at a lower rate can reduce the overall household tax burden, though this must be done carefully to ensure it is effective for tax purposes and does not create unintended consequences for CGT or IHT. Making pension contributions can reduce your adjusted net income, which may help to mitigate the personal allowance taper or other income-related thresholds. Reviewing the financing structure of your portfolio, for example, by paying down higher-interest debt, can reduce the finance costs subject to the restriction, though this needs to be weighed against the opportunity cost of deploying capital elsewhere.
For landlords who are close to the basic rate threshold, it may also be worth considering whether the timing of rental income or expenditure can be managed to keep income within the basic rate band, where the Section 24 restriction has no practical effect.
Does Section 24 apply if I only have one rental property?
Yes. Section 24 applies to all individual landlords letting residential property, regardless of the size of their portfolio. Even a single mortgaged buy-to-let property is affected if you pay tax at more than the basic rate.
Can I still claim mortgage interest as an expense on my tax return?
No. Mortgage interest is no longer entered as an expense in the property income section of your self-assessment return. It is entered separately as a finance cost and the system calculates the 20% tax reduction automatically.
What if my rental property makes a loss?
If your allowable expenses (excluding finance costs) exceed your rental income, you have a property loss. That loss can be carried forward against future property profits. Your finance costs are also carried forward and will generate a tax reduction in a future year when you have sufficient income to absorb it.
Does Section 24 apply to commercial property?
No. The restriction applies only to residential property. Landlords letting commercial premises can continue to deduct finance costs in full.
Does Section 24 apply to limited companies?
No. Companies are not subject to Section 24 and can deduct mortgage interest as a business expense in the normal way.
Section 24 has fundamentally changed the economics of leveraged residential property investment for individual landlords. By replacing a full deduction for mortgage interest with a basic rate tax reduction, it has increased the effective tax burden on higher and additional rate taxpayers, sometimes dramatically, and its effects extend well beyond the headline rental tax calculation to affect adjusted net income, the personal allowance taper, child benefit and a range of other income-related thresholds.
Understanding how Section 24 affects your specific position is the essential first step.
From there, the options range from reviewing your finance cost claims and carry-forwards, to restructuring your portfolio through incorporation or other strategies. The right approach depends entirely on your individual circumstances and the analysis requires a clear picture of your full income position, not just your rental profits in isolation.
UK Landlord Tax provides specialist tax advice for landlords across the UK. If you would like help understanding how Section 24 affects your tax bill or exploring your options, get in touch with our team.
Simon Thandi
Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.
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