Can Section 24 Push You Into Higher Rate Tax?

The short answer is yes. Section 24 can move you from the basic-rate band into the higher-rate band, and in some cases into the 60% personal allowance taper, even when your actual cash profit is small. It happens because of a quiet but important change in what gets taxed: not your real profit, but your rent before finance costs. Once you understand that one shift, the rest of the mechanism is straightforward.

Why Section 24 changes the number that decides your tax band

Before April 2017, a landlord deducted mortgage interest as a normal business expense. Taxable profit was rent minus all costs, interest included, and that profit was what sat on top of your other income to set your tax band. Section 24 removed the deduction in stages and replaced it, from 2020/21, with a 20% basic-rate tax credit on finance costs.

The credit reduces your final tax bill, but it does nothing to your taxable income figure. Your taxable rental income is now rent minus non-finance expenses, with the mortgage interest added back. That larger figure is the one HMRC stacks on your salary, pension or self-employment income to work out which band you land in. So even though your tax bill gets a credit at the end, the band-setting number is inflated first. For most leveraged landlords, the band is decided before the credit ever helps.

This is the core of the trap. The credit lands at the bottom of the calculation; the band-setting damage happens at the top.

What Section 24 phantom income actually is

Phantom income is the gap between the income you are taxed on and the income you keep. With mortgage interest no longer deductible, you pay tax on the slice of rent that goes straight to the lender. That money never touches your account, yet it counts toward the £50,270 higher-rate threshold and the £100,000 personal allowance taper.

Consider the figures most landlords recognise:

• Rental income: £30,000
• Mortgage interest: £25,000
• Other allowable expenses: £3,000
• Real cash profit: £2,000

Under the old rules, taxable profit was £2,000. Under Section 24, your taxable rental income is £27,000 (rent of £30,000 less £3,000 of other costs), and the £25,000 of interest comes back only as a £5,000 credit (20% of £25,000) against the tax bill. So £27,000 is added to your other income to set your band, while your actual pocket sees £2,000. That £25,000 difference is the phantom income, and it is doing all the band-pushing work.

The more highly geared the portfolio, the wider that gap. A landlord on interest-only loans, or one who bought when rates were lower and is now refinancing at today's cost, feels this most sharply. For a deeper walk-through of the credit mechanics, see our guide on how to calculate the Section 24 tax credit step by step.

The tax bands that decide whether you get pushed

For 2026/27, rental income is taxed alongside your other income at the standard UK rates. These are the bands the inflated rental figure has to climb through:

Band	Taxable income (2026/27)	Rate
Personal allowance	£0 to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Over £125,140	45%

There is a second, harsher zone built into this. Between £100,000 and £125,140, the personal allowance is withdrawn at £1 for every £2 of income, which produces an effective marginal rate of around 60%. Section 24's inflated rental figure can drop a landlord into that band on money that was never received. These figures are confirmed at gov.uk income tax rates.

A worked example: salary plus a single buy-to-let

Take an anonymised case. A landlord earns £35,000 from employment and owns one rental property producing £20,000 of rent with £18,000 of mortgage interest and £1,000 of other costs.

• Employment income: £35,000
• Taxable rental income (Section 24 basis): £19,000 (rent of £20,000 less £1,000 of non-finance costs)
• Total taxable income: £54,000

The real rental profit here is only £1,000 of cash after interest. Yet total taxable income is £54,000, which is £3,730 above the £50,270 higher-rate threshold. That £3,730 is taxed at 40% instead of 20%, an extra 20 pence in the pound, roughly £746 of additional tax on income largely paid out to the lender. A £3,600 basic-rate tax credit (20% of £18,000, restricted by the cap where relevant) then reduces the final bill, but it cannot undo the band crossing that has already happened higher up the calculation. Before Section 24, the same landlord on a real £1,000 profit would have stayed comfortably basic rate.

Scale that to a portfolio. Five similar properties can add tens of thousands of phantom income, which is why portfolio landlords often find their marginal rate climbing faster than their cash flow. Our complete Section 24 tax relief guide sets out the full credit cap, which limits the credit to the lower of 20% of finance costs, 20% of rental profit, or 20% of income above the personal allowance.

The cash-flow trap: tax on income you never receive

The damage is not only the higher rate. It is paying that tax out of money you do not have. A landlord running close to break-even on rent can face a tax bill that exceeds the genuine profit, forcing them to fund it from salary, savings or another property's income. In the worst cases it pushes a sale that was never part of the plan.

This bites hardest for:

• Highly geared portfolios where interest eats most of the rent.
• Interest-only mortgages, because none of the payment is capital and all of it is added-back income.
• Recent refinancers who locked in low rates years ago and are now renewing at today's cost.
• Landlords near a band edge, where even a small rent rise tips them over a threshold.

Reviewing your full list of allowable landlord deductions matters more under Section 24, because every legitimate non-finance cost reduces the taxable figure that sets your band.

What changes from April 2027 (and what does not)

From 6 April 2027, property income is taxed at separate rates of 22% basic, 42% higher and 47% additional. These rates were announced at the Autumn Budget 2025 and enacted by Finance Act 2026, which received Royal Assent on 18 March 2026. They apply to property income in England, Wales and Northern Ireland. Only Scotland is carved out, where property income is taxed at Holyrood-set rates. This is settled law, not a proposal.

Crucially, the same Act lifts the Section 24 finance-cost reducer to the new 22% property basic rate in step, so it does not stay frozen at 20%. That detail decides who is better or worse off:

Landlord type	2026/27 wedge	2027/28 wedge	Net effect
Basic rate	None (rate 20%, reducer 20%)	None (rate 22%, reducer 22%)	No new wedge opens
Higher rate	20pp (40% less 20%)	20pp (42% less 22%)	Wedge unchanged; relief rises 20% to 22%
Additional rate	25pp (45% less 20%)	25pp (47% less 22%)	Wedge unchanged; relief rises 20% to 22%

So the headline "rates are going up" hides a more precise truth: the finance-cost wedge does not widen, because the reducer tracks the 22% rate. A basic-rate landlord sees no new wedge at all. A higher-rate landlord's relief actually improves slightly, from 20% to 22%, while still sitting far below their 42% rate. Our analysis of the 2027 property tax rates and Section 24 relief works through this in full. Beware any source that claims a new basic-rate wedge opens in 2027, or that the reducer stays at 20%; both are wrong.

How to plan around the higher-rate push

Section 24 cannot be deducted away, but the band-crossing it causes can often be managed. The right lever depends on whether your problem is the structure of the borrowing, the timing of income, or the headroom in your tax bands.

Pension contributions to reclaim the band

A personal pension contribution extends your basic-rate band by the grossed-up amount, so income that would have been taxed at 40% is pulled back to 20%. For a landlord sitting just over the higher-rate threshold because of phantom income, this is frequently the most efficient single move, subject to the annual allowance and carry-forward of unused allowance from the previous three years. It also addresses the personal allowance taper, since the contribution reduces adjusted net income.

Reduce or restructure the borrowing

Less interest means less added-back income. Paying down debt, or directing capital toward the most highly geared property, shrinks the phantom figure. This is a balance-sheet decision, not just a tax one, so weigh it against the returns you could earn elsewhere on that capital.

Time income and allowable costs

Bringing forward genuine, allowable repairs and revenue costs into a high-income year reduces the taxable figure when it matters most. Where tenancy terms allow, spacing rent increases across tax years can keep you below a threshold. Keep this strictly to real expenditure; artificial timing invites challenge.

Consider company ownership, with eyes open

A limited company is outside Section 24 entirely and deducts mortgage interest in full before corporation tax. For higher-rate, highly geared portfolios this can be decisive. But transferring existing property into a company is a disposal for capital gains tax (residential rates of 18% and 24%, after the £3,000 annual exempt amount) and usually triggers stamp duty land tax, so it is rarely a quick fix. Our buy-to-let limited company guide and the limited company versus personal ownership comparison set out the trade-offs before you commit.

Record keeping and Making Tax Digital

Section 24's calculation depends on one clean distinction: mortgage interest (a finance cost feeding the 20% credit) versus capital repayment (not allowable at all). Mix them up and the credit is wrong. That discipline matters more now that Making Tax Digital for Income Tax is live, with mandation from 6 April 2026 for qualifying income above £50,000, from 6 April 2027 above £30,000, and from 6 April 2028 above £20,000. Quarterly digital records mean your finance costs need to be categorised correctly throughout the year, not reconstructed at the deadline.

Track each of these separately, per property:

• Gross rent received
• Mortgage interest, kept apart from capital repayments
• Other allowable expenses
• Your total income from all sources, so band crossings are visible early

The bottom line

Section 24 can absolutely push you into higher rate tax, because it taxes your gross rent rather than your real profit, and that inflated figure is what decides your band before the 20% credit ever helps. The effect is sharpest for geared portfolios, near a band edge, or close to the £100,000 taper. April 2027 raises property rates to 22%, 42% and 47% but lifts the reducer to 22% in step, so the finance-cost wedge holds rather than widens. The practical answer is to watch your total income across all sources and to plan, through pensions, borrowing structure, timing or ownership, before a threshold catches you out rather than after the bill lands.