Tax Relief on Mortgage Interest: What UK Landlords Can Still Claim in 2026

If you own a buy-to-let property with a mortgage, you are paying interest every month. The obvious question is: can I claim tax relief on that mortgage interest?

The answer is yes—but the way it works has changed significantly since Section 24 of the Finance Act 2015 was phased in. The old system of deducting mortgage interest as an expense is gone. In its place is a tax credit that works very differently depending on your tax bracket.

How Mortgage Interest Relief Works Now

Since April 2020, individual landlords can no longer deduct mortgage interest (or other finance costs) from their rental income before calculating tax. Instead, you receive a basic rate tax reduction—a credit worth 20% of your finance costs.

In practice, this means:

• You declare your full rental income on your tax return
• You deduct allowable expenses (repairs, letting fees, insurance) but not mortgage interest
• You calculate tax on that figure at your marginal rate
• You then subtract a 20% tax credit based on the lower of: your finance costs, your rental profits, or your adjusted total income

What Counts as "Finance Costs"?

The 20% tax credit applies to more than just mortgage interest. HMRC includes:

• Mortgage interest payments
• Interest on loans to buy furnishings
• Fees incurred when taking out or repaying mortgages or loans
• The interest element of alternative finance arrangements (e.g. Sharia-compliant products)

A Worked Example: Basic Rate vs Higher Rate

Consider a landlord earning £12,000 in rent and paying £7,000 in mortgage interest, with £1,000 of other expenses.

Basic Rate Taxpayer (20%):

• Rental Income: £12,000
• Less Allowable Expenses: £1,000
• Taxable Rental Profit: £11,000
• Tax @ 20%: £2,200
• Less 20% Finance Cost Credit (£7,000 × 20%): -£1,400
• Net Tax: £800

Under the old system, the taxable profit would have been £4,000 (£12,000 - £7,000 - £1,000) and tax at 20% would have been £800. For basic rate taxpayers, the result is often the same.

Higher Rate Taxpayer (40%):

• Rental Income: £12,000
• Less Allowable Expenses: £1,000
• Taxable Rental Profit: £11,000
• Tax @ 40%: £4,400
• Less 20% Finance Cost Credit (£7,000 × 20%): -£1,400
• Net Tax: £3,000

Under the old system, tax would have been £1,600 (£4,000 × 40%). The higher rate taxpayer now pays almost double the tax. This is the core penalty of the current system for higher earners.

The "Tax Band Trap"

There is another hidden danger. Because your full rental income is now added to your total income before the credit is applied, it can push you into a higher tax band—even if your actual cash profit is modest. A basic rate taxpayer with a salary near the higher rate threshold could find themselves paying 40% tax on rental income that barely covers the mortgage.

This is sometimes called "phantom profit" taxation: you are taxed on money you never actually received as profit.

Strategies to Maximise Your Position

While you cannot change the legislation, there are legitimate ways to reduce its impact:

• Hold through a Limited Company: Companies can still deduct mortgage interest as a business expense. Corporation Tax (currently 25%) applies to the net profit. This is the most popular strategy for new purchases.
• Transfer to a lower-earning spouse: If one partner is a basic rate taxpayer, shifting ownership can reduce the overall tax burden. A Form 17 declaration to HMRC formalises unequal ownership splits.
• Reduce leverage: Paying down mortgage debt reduces your finance costs and therefore the tax penalty. This may make sense for properties with strong equity.
• Offset mortgages: While you still pay interest, offset arrangements can reduce the total interest charged, lowering your finance cost figure.
• Review your portfolio: Properties with high loan-to-value ratios and low yields are most affected. Selling underperforming assets and reinvesting can improve your after-tax position.

Key Deadlines and Filing

You claim the tax credit through your Self Assessment tax return. Finance costs are entered on the property pages (SA105). If you file online, the 20% credit is calculated automatically by HMRC's system. The deadline for the 2025/26 tax year is 31 January 2027.

If you use Making Tax Digital for Income Tax (mandatory from April 2026 for landlords earning over £50,000), you will report finance costs quarterly instead.