Section 24 Explained: How to Calculate Your After-Tax BTL Cashflow
If your rental profit hasn't changed but your tax bill has gone up, Section 24 is almost certainly why. Since April 2020, individual landlords can no longer deduct mortgage interest from rental income before tax. Instead, HMRC taxes your full rental income and hands back a flat 20% credit on your finance costs — regardless of whether you're a 20%, 40% or 45% taxpayer.
For basic-rate taxpayers this mostly nets out. For higher-rate and additional-rate landlords, it doesn't — and it can drag basic-rate landlords into a higher band even when nothing about the property has actually changed.
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Open the Section 24 stress testWhat Is Section 24 and How Does Mortgage Interest Relief Work?
Section 24 of the Finance (No. 2) Act 2015 restricts the tax relief individual landlords can claim on mortgage interest and other finance costs on residential property. It was phased in between 2017 and 2020 and has applied in full since the 2020/21 tax year.
Before Section 24: mortgage interest was deducted from rental income like any other expense, before tax was calculated.
After Section 24: mortgage interest is added back. You're taxed on rental income before finance costs, then HMRC applies a tax reduction — not a deduction — worth 20% of your finance costs.
The distinction between a deduction and a credit matters enormously:
- A deduction reduces the income you're taxed on. Its value moves with your tax rate — worth 40p per £1 to a higher-rate taxpayer.
- A credit reduces your final tax bill by a fixed percentage, regardless of your rate. Under Section 24, that's always 20%, whether you're a 20%, 40% or 45% taxpayer.
That's the whole mechanism. Everything else in this guide is what falls out of it.
Which finance costs count: mortgage interest, interest on loans to buy or improve the property, and mortgage/loan arrangement fees. It does not cover capital repayments.
Who it applies to: individual landlords and partnerships of individuals holding UK or overseas residential property. It does not apply to furnished holiday lets from the 2025/26 tax year onward — the FHL regime was abolished from 6 April 2025, bringing former FHLs into the same rules as standard buy-to-let. It does not apply to limited companies (more on this below).
The actual HMRC calculation: the 20% credit is calculated on the lowest of three figures — your total finance costs, your property business profit, or your adjusted total income above your Personal Allowance. In practice, for most geared landlords, finance costs is the limiting figure. If you can't use the full credit in one year (e.g. the property made a loss), the unused portion carries forward.
The Hidden Trap: How Section 24 Pushes Landlords Into Higher Tax Bands
Because Section 24 taxes you on rental income before finance costs, your taxable income on paper is higher than your actual profit — even though nothing about the deal has changed. That inflated figure is what determines your tax band, and it's where most of the damage happens.
Worked example — basic-rate taxpayer tipped into higher rate
Emma earns £44,000 from employment. Her rental property brings in £12,000 with £8,000 in mortgage interest.
Old rules (pre-2020): Rental profit = £12,000 − £8,000 = £4,000. Total income = £48,000 — comfortably inside the basic-rate band (up to £50,270 for 2025/26). Tax on rental profit: 20% of £4,000 = £800.
Section 24 rules: Rental profit for tax purposes = £12,000 (finance costs no longer deducted here). Total income = £56,000. That's £5,730 over the £50,270 threshold, taxed at 40% instead of 20%. After applying the 20% credit on the £8,000 finance costs (£1,600), Emma's tax bill on the property is roughly £1,146 higher than under the old rules — and she's now a higher-rate taxpayer for the year, which can also affect things like Capital Gains Tax rates and Child Benefit.
It gets worse above £100,000. The Personal Allowance (£12,570) tapers away at £1 for every £2 of income above £100,000, fully gone by £125,140. Because Section 24 inflates your taxable income, it can pull landlords into this taper who wouldn't otherwise be anywhere near it — creating an effective marginal tax rate of 60% on the income in that band, before rental tax is even considered separately.
Rule of thumb: the higher your non-rental income and the more geared the property, the harder Section 24 bites. A highly-leveraged property held by a higher-rate taxpayer can turn a real cash profit into a real cash loss once tax is accounted for — which is exactly the scenario a gross-yield headline number will never show you.
Step-by-Step: How to Calculate Your After-Tax BTL Income
- Calculate rental profit before finance costs. Rental income minus allowable non-finance expenses (letting agent fees, insurance, repairs, service charges, etc.) — do not subtract mortgage interest here.
- Add this to your other income (salary, other self-employment, dividends) to find your total income for the year.
- Apply income tax at your marginal rate(s) across the relevant bands — this is where band-slicing matters, since income can straddle basic and higher rate.
- Calculate your finance cost credit: 20% of the lowest of (a) total finance costs, (b) property business profit, (c) income above your Personal Allowance.
- Subtract the credit from your tax bill to reach your final tax liability on the property.
- Subtract that liability, plus mortgage capital repayments, from net rental cashflow to get your true after-tax cash position — the number that actually lands in your account.
Doing this by hand across multiple properties and a variable salary gets tedious fast, and it's easy to get the band-slicing wrong manually.
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Run your exact numbers with BricklioSection 24 Mitigation: Personal Ownership vs. Limited Company (SPV)
The most common response to Section 24 is asking whether to hold property through a Special Purpose Vehicle (SPV) limited company instead of personal name, since Section 24 doesn't apply to companies at all — mortgage interest is a normal deductible business expense against Corporation Tax.
- Full mortgage interest deduction restored, taxed at Corporation Tax rates rather than income tax rates.
- Can be more tax-efficient for higher and additional-rate taxpayers building a larger portfolio.
- Transferring existing properties in triggers a disposal. You'll typically pay Capital Gains Tax and Stamp Duty Land Tax as if you sold the property to the company, even though you still own it via shares. This alone can wipe out years of tax savings.
- Company mortgage rates are usually higher than personal buy-to-let rates, and the lender pool is smaller.
- Getting money out of the company (dividends, salary) is a second layer of tax — the saving on the way in can be partly or fully offset on the way out.
- Extra admin and accountancy costs — company accounts, Corporation Tax returns, Companies House filings.
The honest answer: an SPV tends to make sense for new purchases by higher-rate taxpayers building a portfolio from scratch, and tends to make less sense for a small number of existing personally-held properties, where the transfer costs rarely pay back quickly. This isn't a decision to make from a blog post — it needs a run with an accountant against your actual numbers.
A lower-friction option for couples: if one spouse or civil partner pays tax at a lower rate, restructuring ownership (severing joint tenancy to become tenants in common, then filing Form 17 with HMRC) can shift more of the taxable income to the lower-rate partner, reducing the overall Section 24 impact without a company transfer. This has its own legal steps and isn't automatic — professional advice is still the right call before filing.
Frequently Asked Questions
No. Since April 2020, individual landlords can no longer deduct mortgage interest from gross rental income. Instead, HMRC applies a flat 20% basic-rate tax credit against your total finance costs, regardless of your actual tax band.
No. Section 24 only applies to individual landlords and partnerships of individuals. A limited company (SPV) can still deduct mortgage interest in full as a business expense against Corporation Tax, though transferring existing properties into a company triggers Capital Gains Tax and Stamp Duty Land Tax.
Your full rental income (before finance costs) is added to your total income and taxed at your marginal rate — 20%, 40%, or 45%. HMRC then applies a tax reduction worth 20% of the lowest of: your total finance costs, your property business profit, or your income above the Personal Allowance. This reduction is deducted from your final tax bill, not from your taxable income.
Not before the 2025/26 tax year — but the FHL regime was abolished from 6 April 2025, so former furnished holiday lets are now taxed under the same Section 24 rules as standard residential buy-to-let.
Yes. Because Section 24 taxes rental income before finance costs are deducted, your taxable income figure is higher than your real cash profit. If that inflated figure crosses the £50,270 (higher-rate) or £100,000 (Personal Allowance taper) thresholds, you can end up in a higher band or losing part of your Personal Allowance purely because of how the income is calculated — not because you earned more.
This guide is for general information only and does not constitute tax advice. Rates, thresholds and rules referenced are for the 2025/26 UK tax year and are subject to change — always confirm current figures with HMRC or a qualified accountant before making decisions.