Section 24 Explained: The 20% Mortgage Interest Tax Credit for Landlords

Section 24 of the Finance (No. 2) Act 2015 changed how UK landlords are taxed on the cost of borrowing to fund residential rental property. Where mortgage interest and other finance costs used to be deducted from rental profit before tax, they are now relieved as a basic-rate tax reducer worth 20% of the finance cost. The change was phased in from April 2017 and has applied in full since April 2020. For a basic-rate landlord the effect is largely neutral; for a higher-rate or additional-rate landlord it is a material tax increase on identical economic profit. From 6 April 2027 the reducer rises to 22% in line with the new basic rate for property income. This spoke explains the mechanics, the cap on the credit, the worked example, and the wider interactions across the tax return. It sits within the Section 24 hub, the pillar guide for the whole regime.

Section 24 is the foundation the rest of the Section 24 series builds on. The credit mechanics described here are what drive the April 2027 rate-hike exposure discussed in the next spoke on heavily geared portfolios, and they are why income-splitting through Form 17 and SPV incorporation feature so prominently in landlord planning. Understand the credit first; the strategies follow naturally.

How rental profit is now calculated

Under Section 24, rental profit for income tax is computed without deducting finance costs. Allowable expenses such as repairs, insurance, agent fees and management costs are deducted as before, but mortgage interest, loan arrangement fees, overdraft interest on a property facility and similar finance items are no longer subtracted from the profit figure that flows into the tax calculation. The higher pre-finance-cost profit attracts income tax at the landlord's marginal rate, and the finance cost then comes back at the bottom of the return as a basic-rate tax reducer.

The mechanical effect is to push more rental profit into higher tax bands for landlords whose other income, plus rental profit pre-finance-costs, puts them above the higher-rate threshold. A landlord whose total taxable income before Section 24 sat comfortably in the basic-rate band can find themselves paying higher-rate tax on a portion of their rental profit purely because the finance cost is no longer netted off first.

The 20% tax reducer

After the marginal-rate tax is calculated on the higher rental profit, the tax bill is reduced by 20% of the allowable finance cost. The reducer is calculated as 20% of the lowest of three figures: the finance costs for the year, the rental profit for the year, and the landlord's adjusted total income above the personal allowance. This three-way cap is one of the most often overlooked details, and it is what stops the reducer from generating a refund where there is no tax to set it against.

• Total finance costs incurred in the year on residential rental property.
• Rental profit for the year (so the reducer cannot exceed 20% of the profit itself).
• Adjusted total income above the personal allowance (so the reducer cannot exceed 20% of taxable income for the year, excluding savings and dividend income that have their own rates).

The lowest of the three is the figure to which 20% is applied. For a typical landlord with finance costs well below their rental profit and well below their total taxable income, the cap rarely bites and the reducer is simply 20% of the finance costs. For landlords with a low-profit year, a loss year, or a year with limited taxable income outside the property business, the cap can shrink the reducer significantly. Unused finance costs in such a year carry forward to be used against rental profits in future years rather than being lost.

Worked example: higher-rate landlord

A higher-rate landlord with £30,000 of rental income, £4,000 of allowable expenses other than finance costs, and £18,000 of mortgage interest illustrates the change cleanly. Under the pre-2017 rules the calculation deducted the mortgage interest from profit before tax. Under the current rules the calculation keeps it out of the profit and brings it back at 20% at the end.

The same economic profit attracts more than twice the tax under the current rules. For a heavily geared portfolio where finance costs are a large share of gross rent, the effective tax rate on cash profit can exceed 50% and, in extreme cases with high interest and limited profit, exceed the cash profit itself.

Why the change matters most for higher-rate landlords

A basic-rate landlord is broadly indifferent to Section 24 in arithmetic terms. The deduction at 20% they used to get against profit is replaced by a credit at 20% against tax, and the two arrive at the same place. The credit also caps in their favour: a basic-rate landlord whose finance costs exceed their rental profit gets carry-forward of the excess to use against future profits, with no permanent loss of relief.

A higher-rate landlord used to get a 40% deduction against profit and now gets a 20% credit against tax. The 20-point gap is what Section 24 takes away. An additional-rate landlord loses 25 points of relief on the same logic. The change is structural rather than incremental: it does not reduce the relief proportionally for those at higher rates, it caps the relief at 20% for everyone regardless of marginal rate.

What counts as a finance cost

• Interest on mortgages secured on residential rental property.
• Interest on loans taken out to buy or improve residential rental property, whether or not secured on the property.
• Interest on overdrafts or credit facilities used in the rental business.
• Arrangement and similar fees on those mortgages and loans.
• Interest on loans taken out to refinance any of the above.

Section 24 applies only to residential property held by individuals or partnerships of individuals. It does not apply to commercial property let to business tenants, to furnished holiday lets up to the point of the FHL repeal in April 2025, or to residential property held in a limited company, where finance costs remain fully deductible against company profits.

Interaction with the personal allowance and the £100,000 taper

Because Section 24 inflates the figure that goes into adjusted net income, it can push a landlord into the £100,000 personal allowance taper that they would otherwise have escaped. Between £100,000 and £125,140 of adjusted net income, the personal allowance is withdrawn at £1 for every £2 of income, producing an effective marginal rate around 60% on that slice. A higher-rate landlord whose rental profit pre-finance-costs pushes them across £100,000 can lose part or all of their personal allowance, on top of paying tax at 40% on the profit, with only the 20% reducer to soften the bill at the end.

The same dynamic affects the additional-rate threshold at £125,140 and any taper or means-tested charge linked to adjusted net income. Section 24 is rarely seen as a £3,000 or £4,000 increase only; the secondary effects through the income-test thresholds often double the practical bite.

The High-Income Child Benefit Charge

The High-Income Child Benefit Charge tapers Child Benefit between £60,000 and £80,000 of adjusted net income under the post-2024 thresholds. Section 24 raises adjusted net income because rental profit is computed before finance costs are subtracted. A landlord couple in receipt of Child Benefit can find one partner pulled into the taper purely because rental profit looks higher under Section 24 than it does economically. The charge is collected through Self-Assessment and often arrives as an unwelcome surprise.

Student loan repayments

Student loan repayments are calculated on income above the relevant plan threshold. Rental profit forms part of that income, and Section 24 raises the rental profit figure used. For a Plan 2 borrower in particular, this means a higher monthly repayment than the pre-Section 24 calculation would have produced, on the same economic rental profit. The repayment goes against the loan balance rather than HMRC, but the cash leaves the household at the same time as the tax.

Does the reducer always equal 20% of my interest?

Not always. In a year with low or no rental profit, the cap on rental profit can bite and the reducer is limited to 20% of the profit rather than 20% of the interest. In a year with low total taxable income above the personal allowance, the third cap can bite. The excess finance cost is not lost; it carries forward and can be used against rental profits in future years. For a steady-state higher-rate landlord with healthy profits, the reducer usually equals 20% of the interest. For landlords with a difficult year, the cap is worth checking.

What is and is not a Section 24 strategy

Section 24 sits at the level of the legislation; nothing a landlord can do removes the basic mechanic. What landlords can do is reshape the income that is exposed to it. The three main responses, each covered elsewhere in the Section 24 hub, are: moving income to a spouse on a lower marginal rate through Form 17, refinancing onto debt that sits outside the residential restriction where the case allows, and incorporating heavily geared properties into a limited company structure where finance costs remain fully deductible. Each has its own costs and its own qualifying conditions, and none is a free lunch.

Record-keeping for the reducer

For MTD purposes from April 2026, finance costs need to sit in their own category in the digital records so the year-end calculation can apply the cap and the reducer accurately. Mixing finance costs into general expenses makes the year-end reconciliation harder and can lead to under or over-claim of the reducer. Where the records are clean and the bank feed pulls mortgage payments into a dedicated finance-cost category, the reducer calculation becomes a single line on the return rather than a hunt through mixed entries.

Getting help with the calculation

Section 24 is one of those rules where the headline (a 20% credit) is simpler than the practical calculation (three caps, carry-forward, interactions with the personal allowance taper and the Child Benefit charge). A specialist landlord accountant can model the full position for a portfolio, including the secondary income-test effects, and identify whether income-splitting, refinancing or partial incorporation is the right structural response. For most higher-rate landlords with geared portfolios, that modelling pays for itself in the first year of optimisation.