Section 24 restricts mortgage interest relief on residential lettings to a basic-rate tax reducer instead of an expense you deduct from profit. For a landlord whose only income is rent that is awkward. For a PAYE landlord with a salary on top, it is sharper, because your employment income has already filled the basic-rate band before a single pound of rent is counted. Your gross rents are stacked on your salary, so the rental income lands in the 40% band, the £100,000 personal allowance taper, or the High Income Child Benefit Charge far sooner than the rental figures alone would suggest.
This guide sets out how salary plus rental income is actually taxed, shows the gross-up effect with worked numbers, compares an employed landlord against an identical rental-only landlord, and runs through the mitigation that still works. It also covers how the enacted April 2027 property income rates and Making Tax Digital change things, and corrects the widespread claim that a fresh tax wedge opens in 2027/28.
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How Section 24 works when you also have a PAYE salary
Section 24 (the finance cost restriction introduced by Finance Act 2015 and phased in fully by April 2020) does two things at once. First, it stops you deducting mortgage interest and other finance costs from rental profit. Second, it replaces that deduction with a tax reducer set at the basic rate. The reducer comes off your final income tax bill, not off your income.
For an employed landlord the mechanism bites in a specific order:
- Your gross rental income (rents less allowable running costs such as repairs, letting agent fees and insurance, but before mortgage interest) is added to your employment income.
- HMRC charges income tax on that combined total through the normal bands.
- You then receive a basic-rate finance cost reducer, currently 20% of your mortgage interest, subtracted from the tax due.
The reason this hurts PAYE landlords is the stacking order. Your salary fills the personal allowance and basic-rate band first, so the rental profit sits on top, frequently in the 40% band. The reducer only ever gives relief at the basic rate, so on income taxed at 40% you carry a finance cost wedge of 20 percentage points. That gap is the substance of the Section 24 complaint.
A worked Section 24 example for an employed landlord
Take a marketing manager earning £45,000 through PAYE with one buy-to-let producing £18,000 of rent and £12,000 of annual mortgage interest. Assume £1,500 of other allowable costs.
- Old rules (pre-Section 24): taxable rental profit was £4,500 (£18,000 less £12,000 interest less £1,500 costs), taxed on top of the salary as normal income.
- Section 24 today: the rents are added gross of interest. Rental profit before finance costs is £16,500 (£18,000 less £1,500), so total income is £61,500 (£45,000 salary plus £16,500). A reducer of £2,400 (20% of the £12,000 interest) comes off the tax bill.
The salary (£45,000) sits inside the basic-rate band, which runs to £50,270. That leaves only £5,270 of basic-rate room. The £16,500 of rental profit fills that £5,270 at 20% and pushes the remaining £11,230 into the 40% band. The landlord is now a higher-rate taxpayer purely because of the gross-up, and the £2,400 reducer relieves the £12,000 of interest at 20% while that income is being taxed at 40%. The 20-point wedge on the interest is the extra tax Section 24 creates.
Why employed landlords are hit harder than rental-only landlords
The clearest way to see the effect is to compare two landlords with identical properties. Each receives £30,000 of rent with £20,000 of mortgage interest and £2,000 of other costs, so rental profit before finance costs is £28,000.
| Position | Landlord A: rental income only | Landlord B: £42,000 PAYE salary plus the same let |
|---|---|---|
| Employment income | £0 | £42,000 |
| Rental profit before finance costs | £28,000 | £28,000 |
| Total taxable income | £28,000 | £70,000 |
| Band the rents mostly fall in | Basic rate (20%) | Higher rate (40%) |
| Finance cost reducer rate vs rate on rents | 20% reducer against 20% income, no wedge | 20% reducer against 40% income, 20-point wedge |
| Effect of Section 24 | Largely neutral | Materially higher tax on the same property |
Landlord B pays substantially more on an identical property, purely because the salary fills the basic-rate band and forces the rents upward. This is the core of the salary plus rental income problem, and it is why a basic-rate taxpayer with no other income barely notices Section 24 while a 40% PAYE employee feels it sharply.
The thresholds employed landlords cross without noticing
Because the rents count gross, three threshold effects catch PAYE landlords by surprise. None of them depend on the rental profit you actually keep; they all key off the grossed-up total.
Tipping into the higher-rate band
The higher-rate threshold is £50,270 for 2026/27. A landlord earning £42,000 has just £8,270 of basic-rate room left. A modest £15,000 of gross rental profit fills that room and pushes roughly £6,730 straight into the 40% band, even where the real cash profit after a large interest-only mortgage is far smaller. We cover this trigger in detail in our note on whether Section 24 can push you into higher rate tax.
The £100,000 personal allowance taper
Above £100,000 of total income the personal allowance tapers away at £1 for every £2, fully gone by £125,140, which produces an effective marginal rate of about 60% on that £25,140 band. For an employed landlord the gross rents are added before the finance cost reducer, so they count in full towards the £100,000 line. A landlord on a £95,000 salary with £20,000 of gross rents is firmly inside the taper, and the basic-rate reducer does nothing to restore the lost allowance. The interaction is set out further in our guide to the Section 24 personal allowance 60% tax rate trap.
The High Income Child Benefit Charge
The High Income Child Benefit Charge claws back Child Benefit once adjusted net income passes £60,000, fully withdrawn by £80,000. Gross rents push adjusted net income up just as salary does, so an employed landlord receiving Child Benefit can lose part or all of it because the rental income tipped them over the line. The clawback runs through Self Assessment and is easy to overlook when planning a let.
Calculating your combined tax: a step-by-step walk-through
The order of operations matters, because the gross-up happens before any relief. Take Sarah, a teacher earning £52,000 with £24,000 of rent, £15,000 of mortgage interest and £2,000 of other costs.
- Gross rental profit before finance costs: £24,000 less £2,000 = £22,000.
- Total taxable income: £52,000 salary plus £22,000 = £74,000.
- Income tax on the combined total (2026/27 bands): personal allowance £12,570 at 0%, then £37,700 at 20% (£7,540), then £23,730 at 40% (£9,492). Tax before the reducer is £17,032.
- Finance cost reducer: the lower of 20% of the £15,000 interest (£3,000), 20% of the £22,000 rental profit (£4,400), or 20% of income above the personal allowance. The cap bites at £3,000.
- Net income tax: £17,032 less £3,000 = £14,032.
Sarah is a higher-rate taxpayer because her salary already used the basic-rate band, so almost all of her rental profit is taxed at 40% while the interest is relieved at only 20%. That is the wedge in cash terms. For the detailed cap mechanics, including how a restricted reducer carries forward, see our step-by-step Section 24 tax credit calculation.
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What still works: mitigation for PAYE landlords
You cannot deduct the interest, but you can manage the band your rental income falls into and, in some cases, take the property out of the personal-income system entirely. The realistic levers for an employed landlord are these.
Pension contributions
A personal pension contribution extends your basic-rate band by the grossed-up amount. That can pull rental profit back down out of the 40% band and, where your income sits between £100,000 and £125,140, restore tapered personal allowance at the same time. The annual allowance is £60,000 (or 100% of relevant UK earnings if lower), with up to three years of carry-forward of unused allowance. One caveat that catches landlords out: rental income is not relevant earnings for pension purposes, so the amount you can contribute is governed by your salary, not your rents. Our Section 24 pension contributions planning guide works through the band-extension and taper interaction with figures.
Spousal income splitting
Where the property is jointly held and one of you is a basic-rate taxpayer, shifting the income split towards the lower earner moves rents out of the 40% band. For married couples and civil partners, rental income follows beneficial ownership; the automatic split is 50/50, and a Form 17 election lets you declare a different split where you genuinely hold the property in those proportions. The transfer of a beneficial share between spouses is on a no-gain-no-loss basis, so it does not trigger an immediate capital gains charge, though it changes the receiving spouse's base cost for a future sale. The mechanics, and the traps, are in our guide to unequal rental income splits and Form 17.
Limited company incorporation
A company is outside Section 24: it deducts mortgage interest in full before corporation tax. For an employed landlord building a portfolio, that can be decisive, but incorporation is not a free fix. You may crystallise capital gains tax on transferring the properties (residential rates of 18% and 24%), SDLT can arise on the properties moving into the company, the mortgages usually need refinancing onto company products, and you take on annual company filing. Whether it pays depends on portfolio size, gearing, how you intend to draw the profits, and your retention horizon. Compare the routes with figures in our Section 24 vs incorporation comparison.
Watching the band rather than chasing reliefs
For many PAYE landlords the most effective planning is timing rather than structure: bringing forward deductible repairs into a year when the rents would otherwise tip you over a threshold, or making a pension contribution in the same year as a one-off bonus that would push you into the taper. Because your salary is largely fixed, the value lies in managing the rental side around the bands your employment income creates.
Making Tax Digital readiness for employed landlords
Making Tax Digital for Income Tax is now live and phasing in by qualifying income. The threshold is tested on gross income, so a PAYE landlord with substantial rents can be brought into the regime even though most of their money arrives through payroll.
| From | Qualifying income threshold (gross) | Who is caught |
|---|---|---|
| 6 April 2026 | Above £50,000 | Landlords and sole traders over the threshold |
| 6 April 2027 | Above £30,000 | The threshold drops |
| 6 April 2028 | Above £20,000 | The threshold drops again |
Your employment income stays inside PAYE; what changes is that your rental business must be kept on digital records with quarterly updates to HMRC once you cross the threshold, followed by a final declaration that draws the salary and the rents together. In practice an employed landlord needs software that records property income and expenses digitally and integrates with Self Assessment. The full picture for landlords is in our Making Tax Digital for property income guide.
On your return itself, the integration discipline is straightforward but unforgiving: report gross rental income, claim the mortgage interest as a finance cost reducer rather than a deduction, carry the PAYE figures across correctly from your P60, and let the system calculate tax on the combined total. Getting the gross-versus-net treatment right is exactly where Section 24 errors creep in.
The April 2027 change: what actually happens, and what does not
From 6 April 2027, property income is taxed at its own rates of 22% basic, 42% higher and 47% additional, enacted by Finance Act 2026 (Royal Assent 18 March 2026). These rates apply to property income in England, Wales and Northern Ireland; only Scotland is carved out, where Holyrood-set rates apply to property income. Employment income continues to use the standard 20/40/45 rates, so from 2027/28 your salary and your rents are taxed on two different scales.
The point most commentary gets wrong is the finance cost reducer. Finance Act 2026 raises the Section 24 reducer to the new property basic rate of 22% in step with the rates, rather than leaving it frozen at 20%. The table below shows why that matters.
| Taxpayer | 2026/27 rate on rents | 2026/27 reducer | 2027/28 rate on rents | 2027/28 reducer | Finance cost wedge |
|---|---|---|---|---|---|
| Basic rate | 20% | 20% | 22% | 22% | None in either year |
| Higher rate | 40% | 20% | 42% | 22% | 20 points, unchanged |
| Additional rate | 45% | 20% | 47% | 22% | 25 points, unchanged |
So for a basic-rate landlord the reducer (22%) matches the rate on property income (22%) and no new wedge opens. For a higher or additional-rate PAYE landlord the reducer rises from 20% to 22%, a two-point improvement, but it still sits far below the 42% or 47% rate on the rents. The wedge stays at 20 points for higher-rate and 25 points for additional-rate landlords, the same as 2026/27. The change does not widen the gap, and it does not repeal Section 24. We work through the planning implications in our Section 24 and 2027 tax year planning guide.
When to take advice
The interaction between a salary and rental income creates planning scenarios that reward modelling, particularly where you are close to a threshold. A property accountant can run the band-fill calculation, test pension and spousal options, and model whether incorporation changes the answer for your specific portfolio. It is worth a conversation if any of these apply to you:
- Your combined salary and gross rents are near or above £100,000 (the personal allowance taper).
- You receive Child Benefit and your adjusted net income is around £60,000 to £80,000.
- You are weighing incorporation or a beneficial-ownership change with your spouse.
- Your employment income swings year to year because of bonuses or variable hours.
- You have several properties, high gearing, or are planning a purchase or sale.
For the underlying rules behind everything on this page, see our Section 24 mortgage interest restriction guide and the wider property investment tax guide for 2026.