Section 24: what it actually costs a higher-rate landlord
Why you can't deduct mortgage interest any more, how the 20% tax credit works (including the cap that's easy to miss), and the real cost on one deal.
Updated 26 September 2026 · Figures calculated live by the Simple Yield engine
Before April 2017, landlords who owned property in their own name deducted mortgage interest from their rent before working out tax, just like any other cost. Section 24 of the Finance (No. 2) Act 2015 phased that out between 2017 and 2020. Now you pay tax on your rental profit before interest, and get a tax credit worth 20% of the interest instead. Limited companies aren't affected: they still deduct interest as a normal expense.
How the calculation works now
For an individual landlord, each year:
- Taxable profit = rent received minus running costs. Mortgage interest is not deducted.
- Tax on that profit is charged at your marginal rate: 20%, 40% or 45%.
- You get a credit of 20% of the lowest of your mortgage interest, your property profits, and your adjusted total income above the personal allowance. Any unused interest carries forward to future years.
That cap in step three is easy to miss. When interest is larger than your profit, which is common at today's rates, the credit is limited to 20% of the profit, not 20% of the interest. HMRC sets out the full mechanics, with worked examples, on GOV.UK.
What it costs on one deal
Take a £175,000 buy-to-let with 25% deposit, an interest-only mortgage at 5.2%, and rent of £1,200 a month with 8% voids. That's £6,825 of interest a year against a profit before interest of £10,183. For a higher-rate taxpayer:
- Tax under the old rules (interest deducted)
- £1,343
- Tax under Section 24
- £2,708
- Extra tax every year
- £1,365
- Cash left after tax
- £650
The rule costs this landlord £1,365 a year: 20% of the interest, because they lose relief at 40% and get it back at 20%. The same logic by band:
- Basic rate (20%)
- £0
- Higher rate (40%)
- £1,365
- Additional rate (45%)
- £1,706
Basic-rate landlords lose nothing while their profit covers the interest, because the credit matches their tax rate. The damage is concentrated on higher and additional-rate taxpayers, and the rent itself can push a basic-rate earner into the higher band.
What to do about it
First, check the calculation you're relying on applies the current rules, including the cap. Some buy-to-let calculators still deduct interest as if it were 2016, which can overstate a higher-rate landlord's cash flow by more than a thousand pounds a year on a modest deal like this one.
Second, compare the structures properly. Buying through a limited company avoids Section 24, but the fair comparison is what reaches you after dividend tax, not profit sitting inside the company. Our limited company guide runs that comparison on this same deal.
Run your own numbers.
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Open this example →This guide is general information, not financial, tax, or legal advice. Rules change at fiscal events; check the linked official sources and take professional advice before acting.