What Section 24 actually does

Before 2017, a landlord deducted mortgage interest from rental income like any other business expense and paid tax on what was left. Section 24 of the Finance Act 2015 ended that for individual residential landlords.

Now you pay tax on rental profit calculated before finance costs, then receive a tax credit worth 20 per cent of those finance costs, subtracted from your final bill.

For a basic rate taxpayer the maths largely cancels out. For anyone paying 40 or 45 per cent it does not. You are taxed on the full profit at your marginal rate but relieved at 20 per cent, so the effective relief is roughly half what it was.

It was phased in over four years from April 2017 and has applied in full since April 2020. Finance costs go in their own box on the tax return rather than reducing profit.

Finance costs cover mortgage interest, interest on loans for furnishings or equipment for the property, mortgage arrangement fees and broker fees. Capital repayments never qualified, under the old rules or the new ones.

What it costs a higher rate landlord

Take a property producing 24,000 pounds of rent a year, with 4,000 pounds of running costs and 9,000 pounds of mortgage interest.

Under the old rules, taxable profit was 11,000 pounds. A 40 per cent taxpayer paid 4,400 pounds and kept 6,600.

Under Section 24, taxable profit is 20,000 pounds. Tax at 40 per cent is 8,000 pounds, less a credit of 1,800 pounds, giving 6,200 pounds of tax on the same 11,000 pounds of real profit. That is 1,800 pounds more, and an effective rate of about 56 per cent on what you actually earned.

The more leveraged the property, the worse it gets. A landlord whose interest cost exceeds their profit margin can pay tax on a loss.

The credit is also restricted to the lowest of three figures: total finance costs, net property profits, or income above the personal allowance. If your property business makes a loss in a year, perhaps after a large repair, the credit for that year can fall to zero. Unused finance costs carry forward, but only if you keep a running record of them, and many landlords do not.

The knock-on effects people miss

The tax on the property is only part of it. Section 24 inflates your adjusted net income even though the cash in your account has not changed.

• Band creep. Gross rental profit counts toward your total income, so a basic rate taxpayer can be pushed into the higher rate by property they are barely profiting from.
• High Income Child Benefit Charge. Triggered by adjusted net income, which Section 24 raises on paper.
• Personal allowance tapering. Above 100,000 pounds the allowance is withdrawn at one pound for every two pounds of income, producing an effective 60 per cent marginal rate in that band.
• Student loan repayments. Assessed on the inflated figure too.

None of these show up when you look at the property in isolation. They appear on the tax return, which is where most landlords first noticed Section 24 at all.

The 2027 property income tax rates

The bigger change is ahead, and it is already law.

Announced at the Autumn Budget on 26 November 2025 and legislated in the Finance Act 2026, which received Royal Assent on 18 March 2026, rental profits move onto separate property income tax rates from 6 April 2027.

• Property basic rate: 22 per cent
• Property higher rate: 42 per cent
• Property additional rate: 47 per cent

Two percentage points above the main rates at every band. The government's stated reasoning is that landlords pay no National Insurance on rental income, so the increase brings the burden closer to earned income. HMRC estimates around 2.4 million landlords will pay more.

The personal allowance ordering changes with it. From April 2027 the allowance is set against employment, trading and pension income first, and only then against property income. A landlord with 20,000 pounds of employment income and 10,000 pounds of rent will have the allowance absorbed by the salary, leaving the rental income fully taxable at 22 per cent.

Section 24 relief does rise from 20 to 22 per cent in line with the new basic rate. It does not come close to offsetting the increase.

Making Tax Digital

Separate from the rates, and already under way.

Making Tax Digital for Income Tax started on 6 April 2026 for landlords and sole traders whose combined gross income from property and self-employment exceeds 50,000 pounds. The threshold drops to 30,000 pounds in April 2027 and 20,000 pounds in April 2028.

The threshold counts property and self-employment income only. Employment, pension, dividend and savings income do not count toward it, and the test is on gross income rather than profit.

In scope means keeping digital records in compatible software, submitting quarterly updates to HMRC, and making a final declaration after the year end in place of the old return.

Late submissions move to a points based penalty system, with four points triggering a 200 pound fine.

Limited company landlords are outside MTD for Income Tax, since they pay corporation tax and file differently.

Who Section 24 does not apply to

Three exclusions, and the first is why incorporation gets discussed so often.

Limited companies. Section 24 does not apply. A company deducts mortgage interest in full as a business expense before calculating corporation tax. The 2027 property rates apply to individuals rather than companies too.

Commercial property. The restriction targets residential letting only. Interest on commercial mortgages remains fully deductible.

Furnished holiday lettings, until April 2025. FHLs were exempt from Section 24 and had their own reliefs. That regime was abolished on 6 April 2025, and holiday lets are now taxed under the same rules as any other property business, with the same finance cost restriction.

That last point matters if you are reading older advice. Short letting was a way around Section 24. It is not any more.

Should you incorporate?

The question every landlord asks, and the honest position is that it depends on numbers most articles cannot see.

The case for it: full interest deduction, corporation tax rather than income tax on profits, and no exposure to the 2027 property rates.

The costs against it:

• Transferring property to a company is a disposal, which can trigger capital gains tax at the market value.
• Stamp duty land tax is payable on the transfer, including the additional property surcharge.
• Company buy to let mortgages usually price higher than personal ones, and refinancing has its own costs.
• Taking money out of the company is taxed again as dividends or salary.
• Accountancy and filing costs are ongoing.

Incorporation relief can defer the capital gains charge where the letting activity amounts to a genuine business, but it is fact specific and not automatic.

Broadly, it tends to suit larger leveraged portfolios where profits are retained and reinvested, and it tends not to suit one or two properties held for income the owner draws. That is a decision for an accountant who can see your figures, not a decision to make from an article.

What landlords are doing instead

Incorporation is one response. There are others, and they suit different positions.

Reducing leverage. Section 24 bites in proportion to borrowing. Paying down debt lowers the penalty directly.

Transferring to a lower earning spouse. A transfer between spouses is generally free of capital gains tax, and moving income to a basic rate taxpayer restores most of the relief.

Raising rents. Widely done and limited by what the market and, for long lets, the rent rules allow.

Selling. A real and common answer, particularly for landlords near retirement with one or two leveraged properties.

Increasing gross revenue. Short and mid term letting typically produces higher gross income than a long let on the same property. Be clear about what that does and does not achieve. It does not change the tax treatment, because furnished holiday lettings lost their exemption in 2025 and the finance cost restriction applies either way. What it changes is the size of the revenue the tax is applied to. If Section 24 and the 2027 rates have made a property marginal, more gross income is one of the few levers left that does not involve selling or restructuring.

It also carries its own costs and rules. Our guide to serviced accommodation covers the economics, and the Renters' Rights Act guide covers what has changed on the long let side, including when a switch between the two is actually possible.

Filing it correctly

Five mistakes account for most of the errors HMRC sees on this.

• Claiming the whole mortgage payment. Only the interest qualifies. Ask your lender for an annual mortgage interest certificate rather than working from bank statements.
• Deducting interest as an expense. Finance costs go in their own box and reduce tax, not profit. Deducting them understates your profit and is a straightforward error.
• Assuming a full 20 per cent credit. It is restricted to the lowest of three figures, so a loss making year can reduce the credit to nothing.
• Losing carried forward relief. Unused finance costs carry forward indefinitely, but only if recorded and claimed.
• Ignoring the effect on total income. The inflated figure feeds child benefit, personal allowance tapering and student loan calculations.

This is general information, not tax advice. Section 24, incorporation and the 2027 changes all turn on your full financial position, so take advice from a property accountant before acting on any of it.