A stubborn myth circulates among landlords who pay basic rate tax: that Section 24, the mortgage interest restriction, is somebody else's problem. The reasoning sounds tidy. "I pay 20% tax, and the relief is a 20% credit, so it nets off." If only it worked that way. The restriction does not sit neatly inside your tax band. It changes the order of the calculation, and that change can quietly move you into territory you thought you had nothing to do with: higher rate tax, the Child Benefit charge, the personal allowance taper, and a bigger student loan deduction.
This guide is for the landlord earning a normal salary with one, two or three buy-to-lets who has been told not to worry. You should worry, or at least check. Below we set out exactly how Section 24 catches basic rate taxpayers, work through a real example with figures, explain the 20% credit and its cap, cover the 2027/28 change that lifts the credit to 22%, and lay out the practical moves, from pension contributions to incorporation, that actually shift the position.
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How Section 24 works, and why the calculation order matters
Before April 2017, residential landlords deducted mortgage interest from rental income as an ordinary business expense. Your taxable rental profit was rent minus costs minus interest. Section 24 of the Finance (No. 2) Act 2015 phased that out between 2017 and 2020, and since the 2020/21 tax year the restriction has been fully in force.
Today the mechanics are these. You do not deduct mortgage interest or other residential finance costs from rental profit at all. Instead, the full rent (less your non-finance expenses) is added to your taxable income, and you receive a separate 20% tax reducer set against your final income tax bill. The credit is the lower of three figures:
- 20% of the residential finance costs for the year
- 20% of the residential rental profit before any finance cost deduction
- 20% of your total income above the personal allowance
Where the cap bites, the un-credited slice of finance cost is not lost. It carries forward indefinitely and can be relieved in a later year when there is headroom. The restriction applies to individuals, partnerships and trusts. It does not apply to limited companies, which still deduct interest in full before Corporation Tax. That single difference is why incorporation keeps coming up, and we return to it below.
The reason basic rate landlords get caught is the order of operations. Adding the gross rent back inflates the income figure that HMRC uses to decide which band your money falls in before the credit is applied. The credit reduces the tax, but it does not pull your income back down a band. So a person who is comfortably basic rate on their salary can be tipped over a threshold by rent that, after the mortgage, leaves very little in their pocket. For the full mechanics across all taxpayer types, see our complete guide to Section 24 tax relief.
The three thresholds that catch basic rate landlords
The damage Section 24 does to a basic rate taxpayer almost always runs through one of three income thresholds. None of them cares about your "real" profit. They look at the gross figure Section 24 produces.
| Threshold (2026/27) | What crossing it costs | Why Section 24 matters |
|---|---|---|
| £50,270 higher rate threshold | 40% tax on the income above it instead of 20% | Gross rent added back can lift total income over the line even when cash profit is small |
| £60,000 (High Income Child Benefit Charge starts) | 1% of Child Benefit clawed back for every £200 over £60,000; fully removed at £80,000 | The charge is based on adjusted net income, which Section 24 inflates |
| £100,000 (personal allowance taper) | £1 of personal allowance lost for every £2 above, gone by £125,140 (the 60% trap) | Multiple-property landlords sit closer to this than they expect |
Two of these figures changed recently and trip up older guidance. The High Income Child Benefit Charge now starts at £60,000, not £50,000, after the threshold was raised on 6 April 2024, with full withdrawal at £80,000. And the personal allowance taper, the so-called 60% trap between £100,000 and £125,140, is closer than many portfolio landlords assume once gross rents are added back. There is a fourth pinch point too: Plan 2 student loans are repaid at 9% of income above £29,385 (the current threshold), so adding back gross rent increases the slice of income that triggers a repayment.
A worked example: a basic rate landlord pushed over the line
Take Sarah, who earns £35,000 from her job and holds two buy-to-lets producing £18,000 of rent a year. Her annual mortgage interest is £12,000, and she has £1,000 of other allowable costs. On the pre-2017 method she looked firmly basic rate. Here is what Section 24 does.
| Step | Old method (pre-2017) | Section 24 (2026/27) |
|---|---|---|
| Employment income | £35,000 | £35,000 |
| Gross rent | £18,000 | £18,000 |
| Less other costs | (£1,000) | (£1,000) |
| Less mortgage interest | (£12,000) | not deducted |
| Taxable rental profit | £5,000 | £17,000 |
| Total taxable income | £40,000 | £52,000 |
| Falls into higher rate? | No | Yes, on £1,730 above £50,270 |
Under Section 24, Sarah's total income is £52,000, so £1,730 is taxed at 40% rather than 20%, an extra £346 of tax purely from band creep. She then claims a 20% finance cost credit. The cap here is the lower of 20% of £12,000 interest (£2,400), 20% of the £17,000 rental profit (£3,400), and 20% of income above the personal allowance (well above £2,400), so the credit is the full £2,400. That credit reduces her bill, but it does not reverse the band creep, the loss of Child Benefit if she has children whose Benefit takes her over £60,000 adjusted net income, or the extra student loan repayment on the higher income figure.
The headline point: Sarah's actual cash profit from the properties is about £5,000, yet Section 24 makes £17,000 of it taxable and drags part of her salary into 40%. That is the gap a "I'm only basic rate" landlord never sees coming. To put a figure on your own position, our Section 24 calculator and our rental income tax calculator model the band creep and the credit cap together.
Why interest-only and highly geared landlords feel it most
Section 24 restricts relief on finance costs, so the more of your rent that goes on interest, the more of your income is exposed. An interest-only buy-to-let is the extreme case: the entire monthly payment is interest, so the whole of it is caught by the restriction. A repayment mortgage on the same balance has a smaller interest element, so less is caught (although your cash position is tighter because you are also repaying capital).
Loan-to-value is the other dial. A landlord with a 75% mortgage on a low-yielding property can show a healthy taxable profit while generating almost no spare cash, because the interest that would once have wiped out most of the profit is now only relieved at 20%. A landlord with a 40% mortgage on a high-yielding property sits in a much more comfortable place: the cash profit and the taxable profit are close together, and the Section 24 effect is small. If most of your portfolio is interest-only and highly geared, you are squarely in the group Section 24 was designed to reach, even on a basic rate salary.
Does Section 24 actually cost you cash flow?
It is worth being precise here, because the phrase "Section 24 cash flow" gets used loosely. Section 24 does not change your rent and does not change your mortgage payment. What it changes is the tax due on that income, and it brings that tax into charge on the gross figure. You pay tax on the full rent in the year and claim the 20% credit in the same year, so the effect is a higher effective tax rate rather than a genuine timing loan you eventually recover.
The practical squeeze is real all the same. A higher tax bill on income that has already been largely spent on the mortgage means less left to cover voids, repairs and rising rates. For a highly geared basic rate landlord whose interest costs have climbed, the combination of a larger tax bill and a thinner cash margin is exactly the pressure Section 24 produces, even though no money is technically "trapped".
What changes in April 2027, and why no new wedge opens for basic rate landlords
This is the part most older articles get wrong, so it is worth stating carefully against the enacted law. From 6 April 2027, property income in England, Wales and Northern Ireland is taxed at new, separate rates: 22% basic, 42% higher and 47% additional. Only Scotland is carved out for 2027/28, where Holyrood sets the rates. These rates were announced at the Autumn Budget 2025 and enacted by Finance Act 2026, which received Royal Assent on 18 March 2026. They are law, not a proposal.
Critically, Finance Act 2026 (Schedule 1, amending ITTOIA 2005 ss.274AA and 274C and ITA 2007 s.399B) lifts the Section 24 finance cost reducer to 22% from April 2027, in step with the new property basic rate. It is not frozen at 20%. For a basic rate landlord this is the reassuring part: because the credit (22%) matches the rate at which your property income is taxed (22%), no new wedge opens. The relationship that already holds in 2026/27, where a 20% credit matches a 20% property basic rate, simply moves up together to 22%.
Higher and additional rate landlords get a small improvement (their credit rises from 20% to 22%) but the gap between their tax rate and the relief stays the same: 20 percentage points for a higher rate landlord (42% less 22%) and 25 points for an additional rate landlord (47% less 22%), identical to the 2026/27 gaps. The wedge does not widen. Watch out for any commentary claiming the 2027 rates apply to "England and Northern Ireland only" or that "Wales sets its own property rates": that is wrong for 2027/28. Our deeper analysis sits in Section 24 and the 2027 tax year.
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Will Section 24 ever be repealed?
Short answer: there is no announced plan to repeal it, and you should not build a strategy on hope of reversal. Section 24 has been fully in force since April 2020 and survived every Budget since. Finance Act 2026 actively reaffirmed it, keeping the restriction and adjusting the credit to 22% rather than scrapping the mechanism. Treat the mortgage interest restriction as a permanent feature of how individuals are taxed on residential lettings, and plan around it. The landlords who do best are the ones who structured their portfolios for the rules as they are, not the rules they wish they had.
What basic rate landlords can actually do
There are real levers here, and most of them are about managing the band-creep consequences rather than escaping Section 24 itself.
Pension contributions
A personal pension contribution extends your basic rate band by the gross amount paid in. If Section 24 has pushed £1,730 of your income into 40%, as it did for Sarah above, a gross pension contribution of at least that amount pulls it back into basic rate, and can simultaneously rescue Child Benefit (if you were over £60,000 adjusted net income) and the personal allowance (if you were over £100,000). It does not undo Section 24, but it neutralises the most expensive side effects. See pension contributions and Section 24 planning for the mechanics and limits.
Portfolio shape and gearing
Because Section 24 only restricts finance costs, the position improves as gearing falls. Directing surplus cash at the most expensive or highest loan-to-value mortgages reduces the interest that is caught by the restriction. High-yield, low-mortgage properties are the least exposed; low-yield, highly geared ones the most.
Ownership and the marriage angle
Where a property is jointly held with a spouse or civil partner, the rental income (and the finance costs) can be split to use both personal allowances and both basic rate bands. A Form 17 election lets a married couple move away from the default 50/50 split to reflect actual beneficial ownership, although the income and finance costs must follow ownership together; you cannot allocate income 75/25 while keeping the interest at 50/50. Our guide to joint property ownership and the Section 24 split covers the rules.
Incorporation, weighed honestly
A limited company deducts mortgage interest in full, so Section 24 does not apply to company-held property. That is the headline attraction. For a basic rate landlord, though, the case is usually weaker than for a higher rate one, because the annual tax saving is smaller and the one-off transfer costs (potential SDLT, possible CGT, and the cost of running a company and extracting profit) take longer to recover. Section 162 incorporation relief can defer the CGT where the lettings amount to a genuine business and all assets transfer for shares, and a partnership route can sometimes mitigate the SDLT, but neither is automatic. This is a numbers exercise on your specific figures, not a default answer. Compare the routes in Section 24 versus incorporation and weigh the timing in when to incorporate a property portfolio.
Section 24 and your wider CGT position
Section 24 governs income tax, but the decisions it prompts feed straight into capital gains tax. Moving property into a company, selling down highly geared properties, or transferring shares between spouses are all CGT events. Residential property gains are taxed at 18% within your remaining basic rate band and 24% above it for 2026/27, with an annual exempt amount of just £3,000 per person. A basic rate landlord planning a disposal needs to check whether the gain, stacked on top of income that Section 24 has already inflated, pushes part of the gain into the 24% band. Read more in our guide to current CGT rates on property before acting on any Section 24 restructuring.
Getting Section 24 onto the right footing for MTD
Making Tax Digital for Income Tax is now live and arriving on a phased timetable: from 6 April 2026 for landlords and sole traders with qualifying income above £50,000, from 6 April 2027 at £30,000, and from 6 April 2028 at £20,000. Qualifying income is gross rent and trading turnover, not profit, so Section 24's habit of inflating the gross figure matters here too: a landlord whose cash profit is modest can still cross the MTD threshold on gross rents alone.
Under MTD you keep digital records and send quarterly updates. The upside is that the Section 24 effect, the band creep, the credit cap, the cash squeeze, becomes visible across the year rather than landing as a January surprise. That makes proactive planning, pension timing and gearing decisions far easier to get right. The landlords who treat the 2026 to 2028 transition as a prompt to model their position properly tend to make better structural choices than those who react after the fact.
The bottom line for basic rate landlords
Being a basic rate taxpayer does not protect you from Section 24. The restriction works by inflating the income figure before the credit applies, so it can tip you into 40% tax, the Child Benefit charge or the personal allowance taper even when your real profit is small, and it bites hardest on interest-only, highly geared portfolios. The credit rises to 22% in 2027/28 in step with the new property basic rate, so no new wedge opens, but the existing pressure remains. The right response is rarely a single move. It is a combination of managing the thresholds (often with pension contributions), shaping gearing and ownership, and testing incorporation honestly against your own numbers rather than a rule of thumb. If you want that worked through for your portfolio, our property tax specialists can model it with you.