The Section 24 finance-cost restriction does its real damage on portfolios that are profitable on paper but heavily geared. The leverage that built the portfolio is precisely what the rules now penalise. This case study runs the numbers end to end on a £100,000 rental income portfolio held personally, shows where the tax actually lands for 2026/27, what shifts from April 2027, and how to read the incorporation question without the usual hand-waving.
The figures below are a worked illustration, not a quote, and every landlord's position turns on their own income mix and gearing. The point is to make the mechanics visible.
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The portfolio profile
Our landlord, Sarah, is an anonymised composite typical of the clients who reach us once Section 24 has eroded their margin. She is a higher-rate taxpayer with a salaried job alongside the portfolio:
- Annual rental income: £100,000
- Annual mortgage interest (finance costs): £45,000
- Other property expenses: £15,000 (repairs, insurance, letting and management)
- Employment salary: £60,000
Before the restriction was phased in (fully effective from 2020/21), the £45,000 interest was a straight deduction. Her property business then showed a £40,000 profit. Under Section 24 that deduction is gone, replaced by a basic-rate credit. The cash position is unchanged: she still pays the £45,000 to her lenders. The tax position is transformed.
How the Section 24 calculation actually works
The restriction has a specific, three-part shape that the headline "you can't deduct your mortgage" framing obscures. Mortgage interest is removed from the rental profit calculation, and a separate tax credit is given against the overall liability. That credit is capped, and the cap is where the detail lives.
For 2026/27 the credit is 20% of the lowest of three figures:
- the finance costs for the year;
- the rental profit before any finance-cost deduction; and
- total income above the personal allowance (adjusted total income).
Where the credit is capped below 20% of the actual finance costs, the unrelieved portion carries forward indefinitely. From 2027/28 the same mechanism runs at 22%, the new property basic rate, under Finance Act 2026. We explain the broader mechanism in our guide to how the Section 24 mortgage interest restriction works for UK landlords, and you can model your own numbers with the Section 24 calculator.
Sarah's 2026/27 tax calculation, step by step
First, rental profit is calculated without the interest:
| Item | Amount |
|---|---|
| Gross rental income | £100,000 |
| Less non-finance expenses | (£15,000) |
| Taxable rental profit (interest not deducted) | £85,000 |
That £85,000 stacks on top of her £60,000 salary, giving total income of £145,000. At that level her personal allowance is fully tapered away (it disappears entirely by £125,140), so the full £145,000 is taxed:
| Band (England, 2026/27) | Income taxed | Rate | Tax |
|---|---|---|---|
| Basic rate (to £37,700) | £37,700 | 20% | £7,540 |
| Higher rate (£37,700 to £125,140) | £87,440 | 40% | £34,976 |
| Additional rate (above £125,140) | £19,860 | 45% | £8,937 |
| Income tax before the credit | £145,000 | £51,453 |
Now the finance-cost credit. The cap is the lowest of: finance costs (£45,000), rental profit before interest (£85,000), or adjusted income above the allowance (well over £45,000 here). The binding figure is the £45,000 of finance costs, so the credit is 20% × £45,000 = £9,000.
Net income tax: £51,453 − £9,000 = £42,453.
Before and after the restriction
To isolate what Section 24 alone does, compare Sarah's position with the old full-deduction treatment on identical cash numbers.
| Measure | Old full-deduction basis | Section 24 (2026/27) |
|---|---|---|
| Taxable rental profit | £40,000 | £85,000 |
| Total taxable income | £100,000 | £145,000 |
| Personal allowance | Retained | Fully tapered away |
| Income tax (after any credit) | £27,432 | £42,453 |
| Extra income tax from the restriction | ≈ £15,000 |
Roughly £15,000 of additional income tax on the same rent and the same mortgage payments, purely because of how the interest is now treated. Sarah's cash profit has not improved by a penny, yet her effective tax rate on the property activity has jumped sharply. That gap between cash reality and taxable profit is the defining feature of a geared, higher-rate landlord under Section 24, and it is set out in more detail for that group in how Section 24 affects higher-rate taxpayer landlords.
The hidden charges Section 24 drags in
The inflated income figure does not just cost income tax. It pulls in two further effects that landlords routinely miss.
Personal allowance taper
Because the undeducted interest inflates income above £100,000, Sarah loses personal allowance at £1 for every £2, creating the well-known 60% effective marginal band between £100,000 and £125,140. In her case the allowance is gone entirely, which is already reflected in the £42,453 above. For a landlord whose income lands inside the £100,000 to £125,140 corridor, the marginal cost of each extra pound of undeducted interest is brutal.
High Income Child Benefit Charge
If Sarah claims Child Benefit, the higher income figure increases the High Income Child Benefit Charge. The charge tapers between £60,000 and £80,000 of adjusted net income (the threshold raised from 6 April 2024), so a landlord pushed up the scale by Section 24 can lose Child Benefit they would otherwise keep. This is a genuine knock-on cost of the restriction, not a separate decision.
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What changes from April 2027
From 6 April 2027, property income in England, Wales and Northern Ireland is taxed at its own rates: 22% basic, 42% higher, 47% additional. These were announced at the Autumn Budget 2025 and enacted by Finance Act 2026 (Royal Assent 18 March 2026). Only Scotland sits outside this, with Holyrood-set rates on property income.
The point landlords most often get wrong: the Section 24 finance-cost credit rises to 22% in step with the new basic rate. It is not frozen at 20%. Because the credit tracks the property basic rate, no new basic-rate wedge opens. For Sarah, a higher-rate landlord, the credit improves from 20% to 22% of her £45,000 interest (£9,900 instead of £9,000), a modest saving, but the gap between that 22% credit and her 42% property rate still leaves the same structural finance-cost wedge she has now. The full picture for landlords is in our guide to the 2027 property income tax rates for UK landlords.
Reading the incorporation decision
Incorporation is the response that most often shifts the numbers for a landlord in Sarah's position, because a company deducts mortgage interest in full before corporation tax. Section 24 simply does not apply to companies. That is the whole attraction, and also why it is not a free win: the route carries transfer costs and a second layer of tax on extraction.
| Factor | Hold personally | Hold in a company |
|---|---|---|
| Mortgage interest | Restricted; 20% credit (22% from 2027/28) | Fully deductible before corporation tax |
| Tax on profit | Income tax at 40%/45% (42%/47% from 2027/28) for a higher-rate owner | Corporation tax: 19% small-profits rate to £50,000, 25% main rate above £250,000, marginal relief between |
| Extracting cash | Already in your hands | Taxed again as salary or dividend |
| Transfer of existing property | No transfer needed | Capital gains tax on deemed disposal; SDLT including the additional-dwelling surcharge |
| Incorporation relief | n/a | Section 162 CGT relief may defer the gain, but must now be claimed for transfers on or after 6 April 2026 and needs a genuine business |
| Reporting | Self Assessment; MTD for Income Tax on gross rent | Company accounts, corporation tax return, Companies House filing |
Two transfer costs decide most cases. First, moving existing residential property into a company is a disposal for capital gains tax, charged at 18%/24% on the gain after the £3,000 annual exempt amount. Section 162 incorporation relief can roll that gain into the share value and defer it, but since Finance Act 2026 it must be actively claimed for transfers on or after 6 April 2026, and HMRC expects a genuine letting business (typically a portfolio under active management, not one or two passive lets). Second, the company pays stamp duty land tax on the transfer, including the additional-dwelling surcharge, on the market value.
For a higher or additional-rate landlord with significant gearing and a long hold ahead, the in-company interest deduction can outweigh those costs over time. For a lightly geared portfolio, a short remaining hold, or large pregnant gains with no clean Section 162 route, it frequently does not. The honest answer is that it is a modelling exercise specific to your gains, gearing and time horizon, which is exactly the comparison we run in Section 24 versus incorporation: which saves more tax and across the full buy-to-let limited company guide.
The other structural responses
Incorporation is not the only lever, and for some portfolios it is not the right one.
- Deleveraging. Reducing borrowing shrinks the finance-cost figure the restriction bites on. The cost is locking up post-tax capital, and any sale to raise that capital triggers its own CGT.
- Spousal ownership planning. Where one spouse is a basic-rate taxpayer, shifting beneficial ownership (and the matching share of rent and finance costs) can move profit into a band where the credit broadly matches the rate. Income and finance costs must follow the same ownership split; you cannot allocate income one way and interest another.
- Pension contributions. A relievable pension contribution extends the basic-rate band and reduces adjusted net income, which can claw back personal allowance and reduce the High Income Child Benefit Charge. For a landlord pushed up the scale by Section 24, this is often the most overlooked lever.
- Commercial or mixed-use weighting. Genuinely commercial property is outside Section 24, so portfolio composition matters over the long run.
If you sell instead: the CGT position
Some landlords respond to Section 24 by trimming the portfolio rather than restructuring it. On a residential let, the gain (after the £3,000 annual exempt amount) is taxed at 18% within any remaining basic-rate band and 24% above it for 2026/27. Where tax is due, a UK resident must report and pay through the CGT-on-UK-property service within 60 days of completion. The mechanics, including how the band interaction works on a large gain, are set out in our complete guide to capital gains tax on property. Selling to deleverage can ease the Section 24 pressure, but it crystallises a gain that holding would have deferred, so it is rarely a costless escape.
Making Tax Digital lands at the same time
A geared landlord like Sarah is squarely inside Making Tax Digital for Income Tax, which is now live. Mandation runs on qualifying income (gross rent, before the Section 24 restriction): over £50,000 from 6 April 2026, over £30,000 from 6 April 2027, and over £20,000 from 6 April 2028. Because the test is on gross rent, not taxable profit, a heavily geared landlord can be mandated well before their thin taxable margin would suggest. Sarah, on £100,000 gross rent, was in scope from April 2026. The threshold detail is in our note on the MTD qualifying income test, gross versus net.
What this case study shows
On a geared, higher-rate portfolio, Section 24 converts a healthy paper profit into a much heavier tax bill without changing the cash that flows in. The restriction also reaches sideways into the personal allowance taper and the Child Benefit charge, so the true cost is larger than the income tax line alone. The April 2027 rate change lifts the credit to 22% and does not open a new wedge, but it leaves the structural problem for higher-rate landlords intact.
There is usually a route that improves the position, whether that is incorporation, ownership planning, pension contributions, deleveraging, or a combination. Which one wins is specific to your gains, gearing, income mix and time horizon, and the wrong choice carries real friction (a needless CGT charge, an unclaimed Section 162 relief, an SDLT surcharge). If your portfolio looks like Sarah's, the sensible next step is a tailored assessment rather than a rule of thumb.