Section 24: The Tax Rule That Is Costing Landlords Thousands

Section 24 has been fully in force since April 2020. Many landlords know it exists but are hazy on what it actually costs. The worked numbers make the impact concrete: a higher-rate taxpayer on a typical mortgaged buy-to-let can end up paying tax equal to 100% of real annual profit.

That is not a worst-case edge case. It falls out of a straightforward calculation on a property with ordinary numbers.

What Section 24 Is

Section 24 of the Finance (No. 2) Act 2015 restricts how individual residential landlords claim relief on finance costs. It was phased in gradually between April 2017 and April 2020, with the restriction increasing each year until it applied in full from 6 April 2020.

Under the old system, mortgage interest was deducted from rental income before calculating taxable profit. A 40% taxpayer got 40p of tax relief for every pound of interest paid.

Under Section 24, you cannot deduct finance costs from rental income. Instead, HMRC calculates a 20% basic rate tax credit on your total finance costs and applies it against your income tax liability. A 40% taxpayer now gets 20p of credit per pound of interest, regardless of the rate at which that rental income is taxed.

That switch from a full deduction to a fixed 20% credit is the core of the rule.

Source: legislation.gov.uk Finance (No. 2) Act 2015, Section 24; GOV.UK guidance on changes to tax relief for residential landlords [verified June 2026]

What Counts as Finance Costs

The credit covers finance costs as defined by HMRC in the Property Income Manual (PIM2054 and PIM2105). These include:

• Mortgage interest (but not capital repayments on a repayment mortgage)
• Arrangement fees on mortgages and loans
• Loan commitment fees and guarantee fees
• Fees in connection with the security of a loan
• Interest on loans taken out to buy furnishings for the property

Capital repayments receive no relief at all under Section 24. Only the interest element of mortgage payments qualifies.

Arrangement fees are worth flagging specifically. If you remortgaged in the last tax year and paid a product fee, that cost qualifies for the credit. A surprising number of landlords leave it off their self-assessment return and understate their total finance costs as a result.

Source: HMRC Property Income Manual PIM2054 and PIM2105 [verified June 2026]

How the Numbers Work: Two Examples

Take a property generating £1,500 per month in rent, with £12,000 per year in mortgage interest and £2,000 in other allowable expenses. Real annual profit: £4,000.

Higher-rate taxpayer

Under Section 24, taxable profit is calculated without deducting mortgage interest:

• Rental income: £18,000
• Less other expenses (not finance costs): £2,000
• Taxable profit: £16,000
• Tax at 40% on £16,000: £6,400
• Less 20% credit on £12,000 finance costs: £2,400
• Net tax: £4,000

Real profit is £4,000. Tax is £4,000. An effective rate of 100% on actual cashflow.

Under the pre-2017 rules, taxable profit would have been £4,000 after deducting interest. Tax at 40% would have been £1,600. Section 24 costs this landlord £2,400 more per year on one property.

Basic-rate taxpayer, same property

• Tax at 20% on £16,000: £3,200
• Less 20% credit on £12,000: £2,400
• Net tax: £800
• Effective rate on £4,000 real profit: 20%

For a landlord paying tax only at the basic rate, Section 24 leaves the overall position broadly unchanged. The 20% credit offsets the 20% rate on the finance costs. The problem comes next, explained below.

Source: GOV.UK, changes to tax relief for residential landlords, case studies [verified June 2026]

The Hidden Risk: Taxable Income Is Not Real Income

Section 24 inflates taxable income for every landlord, regardless of their tax rate.

Because mortgage interest is no longer deducted before profit is assessed, the full gross rental income sits in your total taxable income. A landlord earning £40,000 from employment and £15,000 net rental profit after expenses, but before mortgage interest, has £55,000 of assessed taxable income. That pushes them £4,730 into the higher-rate band.

Their real cashflow may be modest. Their assessed income looks substantially larger to HMRC. Once they cross £50,270, more of their income is taxed at 40% and the 20% credit does not compensate.

Landlords who sit just below the higher-rate threshold are most exposed to this. A single property with a large mortgage can tip total taxable income across the band, triggering higher-rate tax on income that does not reflect real cashflow.

Who Carries the Biggest Burden

Section 24 costs most for:

• Higher-rate and additional-rate taxpayers holding property personally
• Landlords whose combined employment and rental income crosses the £50,270 threshold
• Those with highly leveraged properties, where mortgage interest is a large share of rent
• Anyone refinancing onto higher rates, where the interest bill has grown while rents have not kept pace

If you fixed your mortgage in 2020 or 2021 at a low rate and are facing a remortgage now, the Section 24 impact will be materially larger than it has been in recent years. A higher monthly interest bill means more finance costs being restricted to a 20% credit.

Why Limited Companies Are Not Affected

Section 24 applies only to individuals holding residential property in their own name. A limited company can still deduct all mortgage interest and other finance costs as a business expense before calculating taxable profit. Corporation tax is then paid on net profit at 19% on profits up to £50,000, or 25% above £250,000.

For the property in the example above, a company would deduct £12,000 in interest, leaving £4,000 taxable profit and a corporation tax bill of roughly £760 at the small profits rate. Compare that to £4,000 for the higher-rate personal landlord.

This difference drives the shift toward company structures. According to Paragon Bank, 43% of all buy-to-let mortgage purchases in 2025 went through limited companies, up from 7.5% in 2018.

Incorporation is not automatically the right answer. Transferring an existing property to a company triggers SDLT at market value and potentially CGT on any embedded gain. On a property worth £300,000 with a significant gain, transfer costs can exceed £30,000 before professional fees. The annual tax saving may take many years to recover those costs. SDLT, CGT, and higher company mortgage rates all need to feed into the calculation before making a decision.

For a full breakdown, see our guide on buy-to-let limited companies.

Source: Paragon Bank landlord research 2025 [verified March 2026]

What Changes From April 2027

From 6 April 2027, property income is taxed at new separate rates confirmed in the GOV.UK Budget 2025 technical note: 22% basic, 42% higher, 47% additional. The Section 24 credit also rises from 20% to 22%, in line with the new property basic rate.

For higher-rate taxpayers, the gap in percentage terms stays at 20 points (42% rate minus 22% credit). Both numbers shift up by 2pp, so the structural disadvantage is unchanged. The absolute tax cost, however, rises because a higher rate applies to a larger taxable income figure.

Using the same worked example, from April 2027 the higher-rate landlord would pay 42% on £16,000 (£6,720), less a 22% credit on £12,000 (£2,640). Net tax: £4,080 versus £4,000 now.

For basic-rate taxpayers who stay in that band, the position is also broadly neutral. The credit increases by the same 2pp as the rate.

A full article covering the April 2027 rate changes in detail publishes Monday 29 June: April 2027: Every Landlord's Tax Rate Is Going Up.

Source: GOV.UK, income-tax-changes-to-tax-rates-for-property-savings-and-dividend-income [verified June 2026]

Practical Steps

Section 24 is confirmed legislation. These are the steps worth taking now:

Check your finance costs claim. Review your last self-assessment return and ensure all eligible costs are included: mortgage interest, arrangement fees on any refinancing during the year, and interest on furnishing loans. Missing these directly increases your tax bill.

Run your numbers. Use RealYield's calculator to model your after-tax return including the Section 24 effect. If a property is barely positive after tax, that calculation changes significantly when rates go up.

Review your structure. If you are a higher-rate taxpayer, particularly one planning further purchases, speak to a specialist property accountant about whether a limited company structure makes sense for future acquisitions. Professional advice is not optional here, given the SDLT, CGT, and remortgaging implications.

Plan for April 2027. The rate increase is confirmed. Modelling the impact on your current portfolio now means the January 2028 tax bill is not a surprise.

For the full walkthrough on reporting Section 24 correctly on your self-assessment return, see our landlord self-assessment guide.

This article is for informational purposes only and does not constitute financial or investment advice. Tax rules and legislation change frequently. Always verify current rates with HMRC or GOV.UK and seek independent professional advice before making investment decisions.