Section 24 Tax Guide for Landlords: How It Affects Your Profits

Section 24 of the Finance Act 2015 fundamentally changed the way landlords are taxed on their rental income. If you own buy-to-let property with a mortgage, understanding this tax change is essential to protecting your profits. Here is a clear, practical guide to how Section 24 works and what you can do about it.

What is Section 24?

Section 24 introduced a restriction on the amount of mortgage interest that landlords can deduct from their rental income when calculating their tax bill. Before 2017, landlords could deduct all of their mortgage interest payments from their rental income before paying tax. This meant you were only taxed on your actual profit after financing costs.

The change was phased in between April 2017 and April 2020. Since April 2020, landlords can no longer deduct any mortgage interest from their rental income. Instead, they receive a basic rate (20%) tax credit on their mortgage interest payments. This may sound like a minor technical change, but for many landlords — especially higher rate taxpayers — it has had a significant impact on profitability.

How Section 24 works: before vs after

The table below shows a worked example for a higher rate (40%) taxpayer to illustrate the real-world impact of Section 24.

In this example, the landlord pays £1,200 more in tax per year under Section 24, reducing their annual profit from £3,600 to £2,400 — a 33% reduction in take-home income from the same property.

Who is most affected?

Section 24 does not affect all landlords equally. The impact is greatest for:

• Higher rate taxpayers (40%+) — the gap between their tax rate and the 20% credit is largest, so they lose the most
• Highly leveraged landlords — if mortgage interest is a large proportion of your rental income, the impact is amplified
• Landlords near tax band thresholds — because mortgage interest is no longer deducted, your taxable income increases, which can push you into a higher tax band even if your actual cash profit has not changed

Basic rate (20%) taxpayers are broadly unaffected, because the 20% tax credit offsets what they would have saved through the old deduction system.

Strategies to reduce the impact

While you cannot avoid Section 24, there are several strategies that can help reduce its impact on your bottom line:

• Incorporating (limited company) — companies can still deduct mortgage interest as a business expense. Corporation tax is currently 25%, which is lower than the 40% or 45% rate many landlords pay. However, transferring existing properties to a company triggers stamp duty and capital gains tax, so this works best for new purchases.
• Reducing mortgage debt — paying down your mortgage reduces the interest you pay, which reduces the Section 24 impact. A better LTV ratio also unlocks lower mortgage rates.
• Switching to interest-only — this does not reduce the Section 24 impact, but it can improve monthly cash flow. However, you are not building equity, so consider this carefully.
• Increasing rents — higher rents improve your gross income, which can offset the additional tax. This is market-dependent and must be balanced against tenant retention.
• Investing in higher-yield properties — properties with stronger yields generate more income to absorb the tax hit. See our guide to the best UK cities for buy-to-let for high-yield locations.
• Spousal transfers — if your spouse or civil partner is a basic rate taxpayer, transferring property ownership (or a share of it) can reduce the overall tax bill. Take professional advice, as this has capital gains tax implications.

Should you incorporate?

Setting up a limited company to hold buy-to-let properties is the most discussed mitigation strategy, but it is not a silver bullet. Here are the key pros and cons:

For landlords buying new properties, incorporating from the start is often the most tax-efficient approach. For those with existing portfolios, the transfer costs can be prohibitive. Speak to a specialist property tax accountant before making this decision.

Calculate your net position

Understanding your actual net profit after Section 24 requires modelling your specific numbers. Start by calculating your rental yield using our rental yield calculator, then work out your tax liability under both the old and new systems to see the real impact. If the numbers are tight, consider which of the strategies above might improve your position.