Section 24 is the rule that restricts mortgage interest tax relief for individual residential landlords. Since 6 April 2020 you can no longer deduct mortgage interest from rental income to calculate taxable profit. Instead, mortgage interest generates a 20% basic-rate tax credit applied after the income tax is calculated. The effect is that higher-rate landlords pay materially more tax than they did under the pre-2017 system, and in some leveraged cases pay tax even when their cash position is loss-making. This calculator runs the comparison between old-style and Section 24 calculations and shows the cash difference at any combination of rental income, mortgage interest and tax band.
What Section 24 changed
Before April 2017, the calculation was straightforward:
Taxable rental profit = Gross rent − All expenses including 100% mortgage interest
This profit was then added to the landlord’s other income and taxed at marginal rates. A higher-rate landlord with £20,000 rent and £8,000 of mortgage interest got 40% relief on the interest — equivalent to a £3,200 tax saving on that interest alone.
From April 2020 (after a four-year tapered transition starting April 2017):
Taxable rental profit = Gross rent − All expenses excluding mortgage interest
Income tax due = (Profit Ã, marginal rate) − (Mortgage interest Ã, 20%)
The mortgage interest is removed from the profit calculation, so the headline taxable rental profit is bigger. Then a 20% credit is applied as a deduction from the tax bill. For a basic-rate taxpayer this is broadly neutral (they were only getting 20% before too). For a higher-rate or additional-rate landlord, relief on interest is now capped at 20% rather than 40% or 45% — a real increase in tax paid.
Worked example: higher-rate landlord
A higher-rate taxpayer with £18,000 of rental income, £4,000 of non-mortgage expenses and £7,000 of mortgage interest in 2026/27.
Pre-2017 calculation:
- Rental profit: £18,000 − £4,000 − £7,000 = £7,000
- Income tax at 40%: £2,800
- Net cash from property after tax: £7,000 − £2,800 = £4,200
Post-2020 (Section 24) calculation:
- Taxable rental profit: £18,000 − £4,000 = £14,000
- Income tax at 40%: £5,600
- Less 20% credit on £7,000 mortgage interest: £1,400
- Net tax: £4,200
- Net cash from property: £18,000 − £4,000 − £7,000 − £4,200 = £2,800
Same actual cash inflows and outflows. Tax goes from £2,800 to £4,200. £1,400 more out of the landlord’s pocket each year because of Section 24.
When Section 24 pushes you into a higher band
The hidden trap of Section 24: because mortgage interest no longer reduces taxable profit, your taxable income is higher than it used to be. A landlord whose total income would be £48,000 under pre-2017 rules might now be at £55,000 under Section 24 rules — pushing the marginal rate from 20% to 40% on the property income. The 20% basic-rate credit doesn’t compensate for the 40% rate they’re now paying.
This is why Section 24 has hit landlords harder than the simple “20% credit instead of full relief” headline suggests. Landlords near the higher-rate threshold can find themselves crossing it because of how the income is now grossed up.
Should landlords incorporate?
Limited company landlords aren’t subject to Section 24. A limited company can still deduct mortgage interest in full from rental profit. The corporation tax rate is 19% to £50,000, 25% above £250,000, with marginal relief in between — typically 19% for most small landlords. After corporation tax, dividends to extract the profit attract dividend tax at 10.75% basic-rate or 35.75% higher-rate. The combined rate on extracted profits can still beat personal Section 24 taxation, particularly for higher-rate landlords with substantial mortgages.
Incorporation isn’t free though. Transferring property from personal name into a limited company triggers:
- CGT on transfer: market value of property less original cost, taxed at 18%/24%. Incorporation Relief can defer this in certain circumstances (the property must be transferred as part of a “going concern” property business — the rules are tight).
- SDLT on transfer: at full residential rates including the 5% surcharge. Multiple Dwellings Relief was abolished in 2024, narrowing the bulk-purchase planning route.
- Mortgage refinancing: most personal BTL mortgages can’t simply transfer; you’ll need to refinance with a company-friendly lender, often at higher rates.
For a four-property portfolio worth £1.2m at incorporation, the upfront SDLT alone could be £80,000+, which takes years to recoup through the lower running tax cost. Incorporation makes most sense for portfolios of 6+ properties, ideally early in the build-up phase before significant capital gains have accrued.
Reduction strategies that don’t require incorporation
Several legitimate strategies can soften Section 24 without going through full incorporation:
- Share to a lower-earning spouse: a Form 17 election can shift rental income towards a spouse with available basic-rate band, where they already share legal ownership.
- Mortgage paydown: every £1,000 of mortgage paid off reduces interest cost permanently and removes the Section 24 effect on that interest. Consider whether redirecting savings into mortgage capital is more efficient than other investments.
- Switch to a mixed-use property: commercial/residential mixed-use isn’t subject to Section 24. This is a significant property strategy choice rather than a tax tweak.
- Hold for longer voids/re-let: doesn’t avoid Section 24 but shifts income into a different tax year, useful for smoothing across band thresholds.
Key takeaways
- Section 24 removes mortgage interest from the rental profit calculation and replaces it with a 20% basic-rate tax credit.
- Basic-rate landlords are roughly neutral; higher-rate and additional-rate landlords pay materially more.
- The grossed-up taxable rental income can push some landlords across the higher-rate threshold for the first time.
- Limited company landlords aren’t subject to Section 24, but transferring properties triggers CGT and SDLT.
- Incorporation typically makes sense for larger or earlier-stage portfolios; for small mature portfolios the transfer costs often outweigh the savings.
Frequently asked questions
Does Section 24 apply to limited company landlords? No. Section 24 applies to individuals (and partnerships of individuals). Limited companies continue to deduct mortgage interest as a normal business expense. This is the structural reason a limited company is more attractive for new landlords than personal ownership in many cases.
Can I avoid Section 24 by switching to interest-only? No. The Section 24 restriction applies to interest costs regardless of mortgage type. Interest-only versus repayment doesn’t change the tax position, only the cash flow shape — interest-only releases more cash now in exchange for a larger capital balance to repay later.
Does Section 24 apply to commercial property? No. Section 24 only applies to residential property held by individuals. Commercial property landlords (offices, shops, warehouses, mixed-use) can still deduct mortgage interest in full from rental income.
What happens if my mortgage interest exceeds my rental profit? The 20% credit cannot exceed the income tax actually due on the rental profit. Excess mortgage interest is carried forward to future tax years and applied against future rental profits. This typically affects very highly geared portfolios in periods of high interest rates and low rents — once rents recover or interest costs fall, the carry-forward unwinds.