If you let out residential property with a mortgage, Section 24 is the rule that quietly reshaped your tax bill. You can no longer simply deduct your mortgage interest from your rental income. Instead, you get a credit worth 20% of your finance costs, and for a lot of landlords that's a worse deal than it sounds.
The change has been fully in force since the 2020/21 tax year, so it isn't new. What's still common is the confusion about how the maths actually works, and why a landlord can show a "profit" on paper while their bank account says otherwise.
This guide is for individual landlords who own buy-to-let property in their own name. We'll explain what Section 24 does, who it hits hardest, and walk through a clear 2025/26 example. All the tax figures here are for the 2025/26 tax year unless we say otherwise.
What is Section 24 and why does it exist? {#what-is-section-24}
Section 24 refers to the part of the Finance (No. 2) Act 2015 that restricted the tax relief landlords can claim on residential property finance costs. "Finance costs" mainly means mortgage interest, but it also covers interest on loans to buy furnishings and the costs of getting a loan, such as some arrangement fees.
Before the change, a landlord deducted all their mortgage interest from their rental income and paid tax on the profit that was left. That meant a higher-rate taxpayer effectively got 40% relief on their interest, and an additional-rate taxpayer got 45%.
The government's stated aim was to make the system fairer, so that landlords with higher incomes no longer got relief at their top rate when other taxpayers don't get the same treatment on their borrowing. The restriction was phased in from 6 April 2017 and has applied in full since 6 April 2020.
Here's how the phase-in worked, taken from HMRC's guidance:
| Tax year | Finance costs deducted from profit | Available as a 20% tax reduction |
|---|---|---|
| 2017/18 | 75% | 25% |
| 2018/19 | 50% | 50% |
| 2019/20 | 25% | 75% |
| 2020/21 onwards | 0% | 100% |
So from 2020/21 onwards, and that includes 2025/26, none of your mortgage interest is deducted from your rental profit. All of it is handled through the tax credit instead.
How does the mortgage interest tax credit actually work? {#how-it-works}
This is the part that trips people up, so let's be precise.
Under Section 24, your mortgage interest no longer reduces your taxable rental profit. Your rental profit is now worked out using your rent minus your other allowable costs, such as letting agent fees, repairs, insurance and ground rent, but not the interest.
You then get a separate "basic rate tax reduction". This is a credit that comes off your final Income Tax bill. For 2025/26 the basic rate is 20%, so the credit is broadly 20% of your finance costs, subject to a cap we'll cover below.
The catch is the rate. If you're a basic-rate taxpayer who stays a basic-rate taxpayer, 20% relief is the same as you'd have got before, so in many cases you're no worse off. But if any of your income is taxed at 40% or 45%, you used to get relief at that higher rate and now you only get 20%. That gap is the cost of Section 24.
There's a second, sneakier effect. Because your full rental income now counts towards your total income (with the interest stripped out), Section 24 can inflate your taxable income and tip you over a threshold, for example into higher-rate tax, or over £100,000 where your Personal Allowance starts to taper away.
What is the Section 24 calculation, step by step? {#the-calculation}
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HMRC sets the credit as 20% of the lowest of three figures. Getting this order right matters, because the cap is what stops some landlords getting the full 20% back.
The basic rate tax reduction is 20% of the lower of:
- Finance costs not already deducted, plus any finance costs carried forward from earlier years.
- Property business profits, that is the profits of your rental business for the year.
- Adjusted total income, meaning your income after losses and reliefs (excluding savings and dividend income) that exceeds your Personal Allowance, which is £12,570 for 2025/26.
Whichever of those three is smallest, you take 20% of it, and that's your credit.
In a straightforward year, your finance costs are usually the smallest of the three, so the credit is simply 20% of your mortgage interest. The cap mainly bites when your rental business made a small or nil profit, or when your other income is low.
Illustrative example: how much does Section 24 cost a higher-rate landlord? {#worked-example}
Illustrative example. Priya is a higher-rate taxpayer. Alongside her £45,000 salary, she lets out one flat in 2025/26. These figures are made up to show the mechanism.
- Rental income: £24,000
- Allowable costs (agent fees, repairs, insurance), excluding interest: £3,000
- Mortgage interest (finance costs): £9,000
Step 1: work out the rental profit (interest excluded). £24,000 - £3,000 = £21,000 rental profit.
Step 2: add it to her other income. £45,000 salary + £21,000 rental profit = £66,000 total income. That's above the higher-rate threshold of £50,271 for 2025/26, so some of it is taxed at 40%.
Step 3: work out the basic rate tax reduction. The credit is 20% of the lowest of:
| Test figure | Amount |
|---|---|
| Finance costs | £9,000 |
| Property business profits | £21,000 |
| Adjusted total income above the Personal Allowance (£66,000 - £12,570) | £53,430 |
The lowest is her finance costs, £9,000. So her credit is 20% × £9,000 = £1,800, taken off her tax bill.
Step 4: compare with the old rules. Under the pre-2017 rules, Priya would have deducted the full £9,000 of interest from her income. As a higher-rate taxpayer, that deduction was worth 40% × £9,000 = £3,600 to her.
So Section 24 leaves Priya £3,600 - £1,800 = £1,800 a year worse off on the same property, purely because of how the interest is now relieved. If interest rates rise and her mortgage cost climbs, that gap widens.
This is why some landlords feel they're "taxed on a loss". The rent counts in full towards their income, but only a fraction of the interest comes back as relief.
Who is affected most by Section 24? {#who-is-affected}
Section 24 doesn't hit everyone equally. In practice, the landlords we see most affected are:
- Higher-rate (40%) and additional-rate (45%) taxpayers with mortgaged residential lets. They lost the most relief, dropping from 40% or 45% down to 20%.
- Highly geared landlords, where mortgage interest is a large share of the rent. The bigger the interest bill, the bigger the relief gap.
- Basic-rate taxpayers pushed into higher rate. Because the full rent now counts as income, a landlord who was just inside the basic-rate band can be tipped over the higher-rate threshold of £50,271, and then taxed at 40% on the top slice. For 2025/26 the basic-rate band runs to £37,700 of taxable income above the Personal Allowance.
- Landlords near £100,000 of income. Adjusted net income over £100,000 starts to remove your Personal Allowance, at the rate of £1 lost for every £2 of income, gone entirely at £125,140. Section 24 can push you into that zone.
If you own residential property through a limited company rather than personally, Section 24 doesn't apply in the same way, because companies deduct mortgage interest as a business expense. That's one reason incorporation comes up so often in landlord conversations, though it carries its own costs and trade-offs that need proper advice first. Our accountancy support for landlords is built around exactly these decisions.
What if my tax credit is bigger than my tax bill? {#unused-credit}
The Section 24 credit can reduce your Income Tax bill, but it can't create a refund. HMRC is explicit: the tax reduction can't be used to generate a repayment.
If the credit ends up capped by your property profits or your adjusted total income rather than by your finance costs, the unused finance costs aren't lost. The difference is carried forward to later years, where it's added to that year's finance costs in the first test above.
This mainly helps landlords who have a poor year, a low-profit or loss-making rental, or low other income, so they can still get value from the interest relief once their position improves.
What can landlords do about Section 24? {#what-to-do}
There's no single fix, and anyone promising a magic workaround should be treated with caution. But there are legitimate steps worth reviewing with an accountant:
- Check whether you're actually a higher-rate taxpayer. If all your income, including the full rent, keeps you within basic rate, Section 24 may cost you little or nothing. It's worth confirming before assuming the worst.
- Model the numbers properly. Run your real figures through the three-step calculation above. You can sense-check the income tax side using our income tax calculator to see where you sit against the thresholds.
- Consider ownership structure. Holding property in a company, transferring a share to a lower-earning spouse, or restructuring debt can change the outcome. Each has stamp duty, capital gains and administrative consequences, so this is firmly advice territory, not a DIY job. Our tax advisory service exists for exactly this kind of planning.
- Keep clean records and file accurately. The credit only works if your finance costs and profits are recorded correctly. Getting your Self Assessment return right protects the relief you're entitled to.
Want to know exactly what Section 24 is costing you? Book a free 20-minute call with a Zmartly accountant. We'll run your real rental figures, show you the relief you're getting, and talk through whether a different structure would leave you better off. Get in touch with Zmartly.
Frequently asked questions {#faqs}
Is Section 24 still in force in 2025/26?
Yes. The restriction was phased in from 6 April 2017 and has applied in full since 6 April 2020, so it's fully in effect for 2025/26. None of your residential mortgage interest is deducted from your rental profit; you get a 20% basic rate tax reduction instead.
Does Section 24 apply to limited companies?
No. The finance cost restriction applies to individuals letting residential property. Companies that hold residential property deduct mortgage interest as a normal business expense, which is one reason some landlords look at incorporating. That decision has its own tax and cost implications, so take advice before acting.
Can I still deduct any of my mortgage interest?
Not as a deduction from rental profit for residential lettings. Since 2020/21 the full amount is handled through the 20% tax credit. Other running costs, such as letting agent fees, repairs, insurance and ground rent, remain deductible from your rental income as normal.
Does Section 24 apply to furnished holiday lets or commercial property?
The finance cost restriction was designed for residential lettings held by individuals. Commercial property is treated differently. The separate tax rules that gave furnished holiday lets favourable treatment were abolished from April 2025, so if you let holiday or commercial property you should get specific advice on your current position.
Will Section 24 push me into the higher-rate tax band?
It can. Because your full rental income now counts towards your total income, with the interest stripped out, your taxable income can rise above the higher-rate threshold of £50,271 for 2025/26 even though your cash position hasn't changed. That's why it's worth modelling your figures rather than assuming.
