Section 24 limits mortgage interest relief to a basic rate tax credit, but many landlords struggle with the calculation. This guide shows you exactly how to calculate your Section 24 tax credit using a clear step-by-step method with real examples.
The Section 24 tax credit replaces the old system where you could deduct mortgage interest as an expense. Instead, you now pay tax on your full rental profit, then claim a 20% tax credit on your finance costs.
Understanding the Section 24 Calculation Method
The Section 24 tax credit calculation follows this basic structure:
- Calculate your total rental income
- Deduct all allowable expenses (except finance costs)
- Add back any finance costs to get your taxable rental profit
- Apply income tax rates to this profit
- Calculate 20% tax credit on your finance costs
- Subtract the tax credit from your income tax bill
This method ensures finance costs are only relieved at the basic rate of 20%, regardless of your actual tax rate.
Step-by-Step Section 24 Calculation Example
Let's work through a detailed section 24 calculation example using a higher-rate taxpayer with a single BTL property:
Property Details
- Annual rental income: £18,000
- Mortgage interest: £8,000
- Other property expenses: £3,000
- Other income: £60,000 (making them a higher-rate taxpayer)
Step 1: Calculate Taxable Rental Profit
Under Section 24, you cannot deduct mortgage interest as an expense:
- Rental income: £18,000
- Less: Other expenses: £3,000
- Taxable rental profit: £15,000
Step 2: Calculate Income Tax on Rental Profit
The £15,000 rental profit is added to their £60,000 other income, making their total income £75,000. This falls into the higher-rate tax band:
- Income tax on rental profit: £15,000 × 40% = £6,000
Step 3: Calculate Section 24 Tax Credit
The tax credit is calculated on the mortgage interest at 20%:
- Section 24 tax credit: £8,000 × 20% = £1,600
Step 4: Calculate Net Tax Due
The final tax liability is the income tax minus the tax credit:
- Income tax on rental profit: £6,000
- Less: Section 24 tax credit: £1,600
- Net tax due: £4,400
Comparing Pre and Post Section 24 Tax
To understand the Section 24 impact, let's compare this with the old system using the same example:
Pre-Section 24 Calculation
- Rental income: £18,000
- Less: All expenses (including £8,000 interest): £11,000
- Taxable profit: £7,000
- Tax at 40%: £2,800
Post-Section 24 Result
- Net tax due: £4,400 (as calculated above)
- Additional tax cost: £1,600 per year
This shows how Section 24 increases the tax burden for higher and additional rate taxpayers, as they lose the benefit of mortgage interest relief at their marginal tax rate.
Section 24 Calculation for Basic Rate Taxpayers
Basic rate taxpayers are typically unaffected by Section 24. Here's why:
Using a landlord with £30,000 other income and the same property:
Income Tax Calculation
- Total income: £30,000 + £15,000 = £45,000
- Income tax on rental profit: £15,000 × 20% = £3,000
- Section 24 tax credit: £8,000 × 20% = £1,600
- Net tax due: £3,000 - £1,600 = £1,400
Pre-Section 24 Comparison
- Taxable profit: £7,000
- Tax at 20%: £1,400
The result is identical because both systems provide 20% relief on the mortgage interest.
Complex Scenarios and Adjustments
Multiple Properties
When you have multiple properties, you calculate the Section 24 impact across your entire portfolio:
- Combine all rental income
- Combine all allowable expenses (excluding finance costs)
- Combine all mortgage interest and finance costs
- Apply the Section 24 calculation to the total figures
Losses and Finance Cost Restriction
If your rental losses exceed your finance costs, the tax credit is limited. You can only claim relief up to the amount of finance costs, not the full loss amount.
For example, if you have:
- Rental profit before finance costs: -£2,000 (a loss)
- Finance costs: £5,000
You can only claim a tax credit on £2,000 of finance costs, not the full £5,000, as this is the amount needed to eliminate the loss.
When Section 24 Doesn't Apply
Section 24 only affects individual landlords and partnerships. It does not apply to:
- Limited companies owning property
- Commercial property investments
- Property trading businesses
- Furnished holiday lettings (though this regime was abolished from April 2025)
This is why many landlords consider incorporating their property business to avoid Section 24 restrictions.
How to Work Out Section 24 Impact on Your Portfolio
To properly work out the Section 24 impact on your specific situation:
- Calculate your current tax position using the Section 24 method
- Compare this with the pre-Section 24 calculation
- Consider the impact of rising property income tax rates from April 2027
- Factor in your long-term property investment strategy
From April 2027, property income will be taxed at separate rates (22% basic, 42% higher, 47% additional rate), which will further increase the Section 24 burden for many landlords.
Tax Planning Considerations
Understanding your Section 24 calculation helps with tax planning decisions:
Timing of Property Purchases
The Section 24 impact varies depending on your total income. Consider timing major purchases when your income might be lower.
Incorporation Analysis
Knowing your exact Section 24 cost helps you evaluate whether incorporating your property business would be beneficial.
Pension Contributions
Increasing pension contributions can reduce your overall tax rate, potentially reducing the Section 24 impact if it brings you down from higher to basic rate.
Record Keeping for Section 24
Accurate calculation requires detailed records:
- Separate tracking of mortgage interest vs capital repayments
- Clear categorisation of all property expenses
- Documentation of any property used for business purposes
- Records of any periods when properties were not let
With Making Tax Digital for landlords becoming mandatory from April 2026, digital record keeping will be essential.
Getting Professional Help
Section 24 calculations can become complex with multiple properties, different mortgage arrangements, and varying rental periods. A specialist property accountant can ensure accurate calculations and identify tax planning opportunities.
Professional help is particularly valuable when considering incorporation, as the decision requires modeling both your current Section 24 position and projected future tax liabilities under company ownership.