Section 24 changed how landlords are taxed on borrowing, not how much rent they earn. Since 6 April 2020 you no longer deduct mortgage interest from rental profit. Instead you pay tax on the full profit and receive a basic-rate tax reducer worth 20% of your finance costs for 2026/27, rising to 22% from 6 April 2027. The arithmetic is not difficult, but the order of the steps and a three-part cap that most landlords have never heard of are where the calculation goes wrong. This guide works it through by hand so you can reproduce the figure HMRC will expect, and check whatever a Section 24 calculator tells you.
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The six steps to calculate your Section 24 tax credit
Every Section 24 computation, however many properties you hold, follows the same sequence. Work top to bottom and resist the temptation to net interest off early.
- Find taxable rental profit before finance costs. Rental income less every allowable expense except mortgage interest.
- Stack that profit on your other income and find the income tax attributable to it using the bands in order.
- Total your finance costs for the year (interest, not capital repayments).
- Calculate the unrestricted reducer: finance costs times the basic rate (20% for 2026/27, 22% from 2027/28).
- Apply the three-part cap and take the lowest figure as your actual reducer.
- Subtract the reducer from your income tax bill, and carry forward any amount the cap restricted.
The single most common mistake is treating the reducer as if it were a deduction from profit. It is not. It is a credit against the tax bill, applied at the very end, and that placement is precisely why higher-rate landlords end up worse off.
Worked example: higher-rate landlord, single buy-to-let
Take a landlord with a salary of £60,000 and one residential rental property:
- Annual rental income: £18,000
- Mortgage interest (finance costs): £8,000
- Other allowable expenses (repairs, insurance, agent fees): £3,000
Step 1, taxable rental profit before finance costs: £18,000 less £3,000 = £15,000. Note that interest is not deducted here.
Step 2, tax on the rental profit: the £15,000 sits on top of £60,000 of salary, so it falls entirely in the higher-rate band. Tax attributable to the rental profit is £15,000 at 40% = £6,000.
Step 3, total finance costs: £8,000.
Step 4, unrestricted reducer: £8,000 at 20% = £1,600.
Step 5, the three-part cap. The reducer is the lower of: 20% of finance costs (£1,600); 20% of property profit before finance costs, £15,000 at 20% (£3,000); and 20% of adjusted income above the personal allowance, which is comfortably more than £1,600 here. The lowest is £1,600, so the cap does not bite.
Step 6, net tax on the rental activity: £6,000 less the £1,600 reducer = £4,400.
Under the pre-2017 rules the same landlord would have deducted the £8,000 interest, leaving £7,000 of profit taxed at 40% = £2,800. Section 24 therefore costs this landlord £1,600 a year, exactly the 20-percentage-point gap between the 40% rate paid on the interest-inflated profit and the 20% rate of relief on the interest.
Worked example: basic-rate landlord (why the outcome is neutral)
Keep the property identical but give the landlord £30,000 of other income instead of £60,000.
- Rental profit before finance costs: £15,000
- Total income: £30,000 + £15,000 = £45,000, still inside the basic-rate band
- Tax on rental profit: £15,000 at 20% = £3,000
- Reducer: £8,000 at 20% = £1,600
- Net tax: £3,000 less £1,600 = £1,400
Under the old method the profit would have been £7,000, taxed at 20% = £1,400. The result is identical, because relief on the interest is given at 20% under both systems. This is the heart of the rule: Section 24 is neutral for landlords who stay within the basic-rate band and only bites once part of your income is taxed above 20%. The hidden danger is the £45,000 total: it leaves only £5,270 of basic-rate band before the 40% threshold, so a modest rent rise or a second property can quietly convert this landlord into a Section 24 loser.
Where the three-part cap actually bites
The cap exists to stop the reducer exceeding the tax you would otherwise pay. For a profitable single-property landlord it is invisible, but it becomes the binding constraint in three situations: a low or nil property profit, finance costs that are large relative to profit, and a year where most of your income falls within the personal allowance. Test all three limbs every year; the lowest wins.
| Cap limb (2026/27) | What it limits | When it bites |
|---|---|---|
| 20% of finance costs | The reducer to a fifth of your interest | The usual binding limb for a profitable landlord |
| 20% of property profit before finance costs | The reducer to a fifth of pre-interest profit | Loss-making or low-profit years; interest large vs profit |
| 20% of adjusted income above the personal allowance | The reducer to a fifth of taxable income | Years where most income sits within the personal allowance |
From 6 April 2027 the same three limbs are calculated at 22% rather than 20%, in line with the new property basic rate.
Worked example: the cap restricting relief in a loss year
Suppose a refurbishment year leaves a property in a small loss before interest:
- Property profit before finance costs: a loss of £2,000
- Finance costs: £5,000
The unrestricted reducer would be £5,000 at 20% = £1,000. But the second limb (20% of property profit before finance costs) is nil, because there is no profit. The reducer for the year is therefore nil. The full £5,000 of finance costs is carried forward and added to next year's finance costs, where it can generate relief once the property returns to profit. The £2,000 loss is carried forward separately against future rental profits. Two carry-forwards, running in parallel, are easy to lose track of without a clear schedule.
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Multiple properties: pool, do not run property by property
Section 24 looks at your residential lettings as a single business. You combine all rental income, combine all allowable expenses except finance costs, and combine all finance costs across the portfolio before applying the bands and the cap. This pooling is usually helpful: a loss on one property is absorbed by profit on another, so the second limb of the cap is tested against the net pooled profit rather than the worst individual property.
| Step | Property A | Property B | Pooled (what goes on the return) |
|---|---|---|---|
| Rental income | £14,000 | £10,000 | £24,000 |
| Expenses (ex-interest) | £3,000 | £2,000 | £5,000 |
| Profit before finance costs | £11,000 | £8,000 | £19,000 |
| Finance costs | £6,000 | £5,000 | £11,000 |
The reducer is £11,000 at 20% = £2,200, capped by the lower of the three limbs. With £19,000 of pooled profit the profit limb (£3,800) is well above the finance cost limb, so £2,200 stands. If you mistakenly ran Property A and Property B separately you would risk over-restricting on a single weak property. The cumulative impact across a portfolio is best modelled on the pooled figures.
The April 2027 change: a higher reducer, no new wedge
Finance Act 2026 received Royal Assent on 18 March 2026 and introduced separate property income tax rates from 6 April 2027. For 2027/28 onwards, property income in England, Wales and Northern Ireland is taxed at 22% basic, 42% higher and 47% additional; only Scotland is carved out, where Holyrood sets the rates. Critically, the Section 24 reducer is not frozen at 20%. It rises in step to 22%, because the legislation ties the reducer to the property basic rate (FA 2026 amends ITTOIA 2005 and ITA 2007 s.399B).
The practical consequence is widely misunderstood. A basic-rate landlord pays 22% on property income and receives a 22% reducer, so the two still cancel and no new wedge opens. A higher-rate landlord sees the reducer improve from 20% to 22%, but the rate on profit also rises from 40% to 42%, so the finance cost wedge stays at 20 percentage points. The April 2027 reform raises the headline rates; it does not change the shape of Section 24.
| 2026/27 | 2027/28 onwards (England, Wales, NI) | |
|---|---|---|
| Property basic rate | 20% | 22% |
| Property higher rate | 40% | 42% |
| Property additional rate | 45% | 47% |
| Section 24 reducer rate | 20% | 22% |
| Higher-rate finance cost wedge | 20pp (40 − 20) | 20pp (42 − 22) |
| Basic-rate finance cost wedge | 0pp | 0pp |
Rerun the higher-rate example at 2027/28 rates and the structure holds: £15,000 profit at 42% = £6,300, less a reducer of £8,000 at 22% = £1,760, giving net tax of £4,540. The cash cost rises because the headline rate rose, not because Section 24 toughened. For a fuller treatment see our guide to the 2027 property tax rates and Section 24 relief.
How the inflated profit figure raises tax elsewhere
The arithmetic of the reducer is only half the story. Because the profit on your return is struck before interest, it is a larger number than your real economic profit, and that larger number ripples through the rest of your computation in ways the reducer cannot undo:
- Personal allowance taper. Above £100,000 of adjusted net income the personal allowance falls by £1 for every £2, fully gone at £125,140. The inflated rental profit can drag you into this 60% effective band.
- Higher-rate threshold. The pre-interest profit, not the real profit, decides whether you cross £50,270, which in turn decides whether the wedge opens at all.
- High Income Child Benefit Charge. The inflated income figure can trigger or increase the child benefit clawback for landlords with children.
This is why two landlords with identical bank balances can pay very different tax: the one whose interest is large relative to profit carries a bigger gross profit figure through the whole calculation.
Records and Making Tax Digital readiness
An accurate Section 24 figure depends on clean records, and Making Tax Digital makes that non-negotiable. Keep these separate from the outset:
- The interest element of each mortgage payment, split from capital repayments (your annual mortgage statement shows both).
- Incidental finance costs such as broker and arrangement fees, which also qualify for the reducer.
- Allowable property expenses, categorised so they are not muddled with finance costs.
- A running schedule of any reducer restricted by the cap and any rental losses, both carried forward.
Making Tax Digital for Income Tax is being phased in by income level: landlords and sole traders with qualifying income above £50,000 join from 6 April 2026, above £30,000 from 6 April 2027, and above £20,000 from 6 April 2028. Finance costs are reported through the quarterly updates and finalised at the end-of-period statement, but the reducer mechanics described here are unchanged. Our guide to the Making Tax Digital deadline for landlords sets out the thresholds and software requirements in full.
When Section 24 does not apply
The restriction targets individuals, partnerships and trusts holding residential lettings. It does not apply to:
- Limited companies, which deduct mortgage interest in full against profits before Corporation Tax. This is the central driver behind landlords weighing up a buy-to-let limited company structure.
- Commercial property lettings, where finance costs remain fully deductible.
- Furnished holiday lets before 6 April 2025. The FHL regime was abolished from that date, so former holiday lets now sit inside the standard residential rules and the Section 24 restriction.
Knowing your exact Section 24 cost is the starting point for any incorporation decision, because the comparison has to weigh the annual reducer restriction against the Corporation Tax position, the SDLT and CGT on transfer, and the cost of extracting profits as dividends. That modelling is where a specialist property accountant earns their keep, and it is rarely as clear-cut as portfolio landlords assume.