How Section 24 Affects Higher-Rate Taxpayers: A 2026 Guide for UK Landlords

Section 24 does not tax all landlords equally. A basic-rate taxpayer who stays inside the 20% band barely notices it. A higher-rate or additional-rate taxpayer loses the difference between their marginal rate and a flat 20% credit on every pound of mortgage interest, and then pays again when the disallowed interest inflates their taxable income and trips a clawback. If you earn over £50,270 and hold geared residential property, this page sets out exactly where the money goes and which moves actually reduce it.

Why higher-rate taxpayers feel Section 24 most

Before April 2017, mortgage interest was an ordinary expense. You deducted it from rent, and a 40% taxpayer got 40% relief. Section 24 removed that deduction in stages and replaced it with a basic-rate tax reduction. Since 6 April 2020 the rule has been fully in force: residential finance costs are not deducted from rental profit at all. Instead HMRC works out your tax on the full rent (less other expenses) and then subtracts a tax credit equal to 20% of your finance costs.

For a basic-rate taxpayer, 20% relief by deduction and a 20% credit produce the same answer. For a higher-rate taxpayer they do not. The relief used to be worth 40 pence in the pound; now it is worth 20. That 20 pence gap on every pound of interest is the core of the problem, and for a 45% additional-rate taxpayer the gap is 25 pence. The statutory mechanism sits in sections 272A and 274A of the Income Tax (Trading and Other Income) Act 2005, inserted by section 24 of the Finance (No. 2) Act 2015, which is where the name comes from.

The real cost: a worked example for a 40% taxpayer

Consider an anonymised higher-rate landlord. She earns £60,000 from employment and holds one buy-to-let in Manchester:

• Annual rent: £18,000
• Mortgage interest: £8,000
• Other allowable costs (agent, repairs, insurance): £2,000

Under the old rules her taxable rental profit was £18,000 minus £8,000 minus £2,000, which is £8,000, taxed at 40%: £3,200 of tax. Under Section 24, the interest is not deducted. Her taxable rental profit becomes £18,000 minus £2,000, which is £16,000. That £16,000 sits on top of her salary and is taxed at 40%, giving £6,400. She then takes a 20% credit on the £8,000 of interest, worth £1,600. Her tax on the property is £6,400 minus £1,600, which is £4,800.

She pays £4,800 instead of £3,200, an extra £1,600 a year on exactly the same property and exactly the same economic profit. The £1,600 is simply 20% of her £8,000 interest, the relief she used to get at 40% but now gets at 20%. Nothing about her rent, costs or cash flow changed. Only the tax treatment did.

The hidden traps: tax bands, the personal allowance and child benefit

The 20% gap is the headline, but it is not the worst of it. Because Section 24 reports the full rent as income, it can inflate your taxable income enough to trip three separate thresholds that the old deduction method kept you below.

Being pushed into the higher-rate band

Take an anonymised landlord on a £48,000 salary with rent of £15,000 and mortgage interest of £10,000. Under the old rules his property profit was £5,000, so his total taxable income was £53,000. Under Section 24 the full £15,000 of rent is added, lifting total income to £63,000. He has been pushed roughly £12,730 into the higher-rate band, paying 40% on income that would previously have been taxed at 20%, while his £10,000 of interest only earns a £2,000 credit. The same dynamic is covered in depth in our guide on whether Section 24 pushes landlords into higher-rate tax.

Losing the personal allowance (the 60% band)

Once total taxable income exceeds £100,000, the personal allowance is withdrawn by £1 for every £2 of income above that line, creating an effective marginal rate of around 60% between £100,000 and £125,140. Section 24 can push a landlord into this zone using rental income they have already spent on mortgage interest. We unpack this in our guide on Section 24 and the 60% tax trap.

Triggering the High Income Child Benefit Charge

The High Income Child Benefit Charge now bites between £60,000 and £80,000 of adjusted net income. A landlord whose real profit is modest but whose grossed-up rental figure crosses £60,000 can find themselves clawing back child benefit they would have kept under the old deduction rules.

None of these traps are about the rent you keep. They are about the larger income figure Section 24 forces onto your return. That is why two landlords with identical net profit can face very different bills.

The cash-flow squeeze on geared portfolios

For highly geared landlords, Section 24 is as much a cash-flow problem as a tax one. Tax is charged on rental income before the bank is paid, so it is entirely possible to owe tax on a property that produces little or no spare cash after the mortgage. In a higher-interest environment a landlord can be making a real-world loss on a property while still writing a cheque to HMRC, because the interest that wiped out the profit only generated a 20% credit. Modelling the after-tax, after-mortgage position on each property, rather than the headline yield, is the single most useful exercise a higher-rate landlord can do.

What actually reduces the Section 24 burden

There is no switch that turns Section 24 off for an individual. The credit is fixed at basic rate by statute. What works is reducing the income that is exposed to 40% tax, or moving the property into a structure the restriction does not reach. The genuine levers, in rough order of how often they help, are below.

Pension contributions

A personal pension contribution extends your basic-rate band by the grossed-up amount, so more of your income (including the inflated rental figure) is taxed at 20% rather than 40%, and it reduces adjusted net income for the personal-allowance taper and child benefit charge. It does not change the 20% credit, but it directly counters the band-creep Section 24 causes, and it builds a tax-relieved asset at the same time. For higher earners it is frequently the most efficient single response. Our guide on Section 24 and pension contributions works through the numbers.

Splitting income with a spouse

For jointly owned property, married couples and civil partners can change the beneficial-ownership split and file a Form 17 election so that more of the taxable rent falls on the lower-earning partner. Moving income from a 40% spouse to a basic-rate or non-earning spouse shrinks the share exposed to the credit gap. It requires genuine beneficial ownership, must be in place before the rent arises, and can carry CGT and SDLT consequences on the transfer, so it needs planning rather than retrofitting.

Incorporating the portfolio

Companies sit outside Section 24 entirely and deduct mortgage interest in full. For a heavily geared higher-rate landlord that can be transformative, but incorporation is a tax event in its own right and is rarely worthwhile for a small, lightly-mortgaged holding. The comparison below sets out the trade-offs, and our dedicated guide on Section 24 versus incorporation goes deeper.

Rebalancing the portfolio

Some landlords reduce gearing on residential property, switch towards commercial or mixed-use holdings (where interest stays fully deductible), or sell the worst-performing geared properties and redeploy. These are strategic decisions with their own CGT and stamp duty costs, not quick fixes, but for portfolios where the after-tax return no longer justifies the risk they can be the right answer.

Section 24 versus incorporation: a side-by-side comparison

The most common question higher-rate landlords ask is whether to keep holding personally and absorb Section 24, or move into a limited company. There is no universal answer, but the structural differences are clear.

Feature	Personal ownership (Section 24 applies)	Limited company (Section 24 does not apply)
Mortgage interest relief	20% basic-rate tax credit only	Deducted in full against profit
Rate on profit (2026/27)	20% / 40% / 45% income tax	19% small profits rate up to £50k, 25% above £250k, marginal relief between
Effect on personal allowance and child benefit	Grossed-up rent can trigger the 60% band and the child benefit charge	Company profit retained inside the company does not affect your personal thresholds
Extracting the money	Already in your hands as personal income	Dividend or salary tax applies on extraction, on top of corporation tax
Cost of moving existing property in	None, you already own it	CGT on the disposal (18% / 24% residential) plus the 5% SDLT additional-dwelling surcharge, unless a relief applies
Best suited to	Lower gearing, smaller holdings, no expansion plans	High gearing, retained-profit and reinvestment plans, portfolio growth

For a deeper structural treatment, our guides on the buy-to-let limited company and on limited company versus personal ownership compare the full lifetime cost rather than the year-one snapshot.

The capital gains tax angle when you sell or transfer

Section 24 planning rarely stops at income tax, because the routes that reduce the income hit (incorporating, selling geared stock, moving property to a spouse) are usually disposals for capital gains tax. For 2026/27 residential property gains are taxed at 18% for the basic-rate part and 24% for the higher-rate part (under the unified rates in section 1H of the Taxation of Chargeable Gains Act 1992), with an annual exempt amount of just £3,000. Reporting and payment for residential disposals are due within 60 days of completion.

The practical point is that a Section 24 fix and a CGT bill often arrive together. Transferring a property to a lower-earning spouse, or incorporating, can save income tax for years but crystallise a gain today. The decision is whether the ongoing income tax saving justifies the one-off CGT (and SDLT) cost, which is a cash-flow and timing question. Our capital gains tax on property guide sets out the reliefs and timing levers that can soften the disposal.

What changes in April 2027 (and what does not)

From 6 April 2027 property income will be taxed at its own set of rates: 22% basic, 42% higher and 47% additional, a flat 2 percentage points above the general income tax bands. These rates were enacted in the Finance Act 2026 (Schedule 1) and apply in England, Wales and Northern Ireland. Only Scotland is carved out for 2027/28, and the separate power for Wales to set its own property rates is a future provision that is not in force for that year.

The important point for Section 24 is what does not change. The mortgage interest credit rises in step from 20% to 22%, so a higher-rate landlord's gap between the 42% rate and the 22% credit stays at 20 percentage points, exactly as the 40%-versus-20% gap is today. No new basic-rate wedge opens. The real change is a flat 2 percentage points on net rental profit after finance costs, which is why a landlord with thin net profit after interest sees a smaller cash rise than the gross figures suggest. We cover the detail in our guides on Section 24 for higher-rate taxpayers in 2027 and on Section 24 and 2027 tax-year planning.

Making Tax Digital: the new compliance layer

Section 24 now sits alongside Making Tax Digital for Income Tax, which is live from 6 April 2026 for landlords and sole traders with qualifying income over £50,000. The threshold falls to £30,000 from 6 April 2027 and to £20,000 from 6 April 2028. Affected landlords must keep digital records and send quarterly updates to HMRC using compatible software, with a final declaration after the year end.

The Section 24 figure does not disappear under MTD; it moves into a digital workflow. Because the restriction reports your full rent as income and applies the credit separately, accurate quarterly records of finance costs matter more than ever, and the higher tax thrown up by Section 24 lands inside the same quarterly cycle. Our guide on Making Tax Digital for landlords sets out the practical steps, and our note on the Section 24 entries on the tax return shows where the finance-cost box now sits.

Where higher-rate landlords usually go wrong

Three mistakes recur. The first is treating the 20% credit as the whole story and missing the band, personal-allowance and child-benefit knock-ons, which are often larger than the headline interest gap. The second is incorporating reflexively because the company route removes Section 24, without modelling the CGT, SDLT and extraction costs that can swallow years of saving. The third is leaving spousal splits and pension contributions until after the tax year has closed, when the income has already arisen and the planning window has gone.

Section 24 is settled law and is not going to be reversed, so the value is in planning around it deliberately rather than reacting to the bill in January. The right answer for a single lightly-mortgaged flat looks nothing like the right answer for a ten-property geared portfolio, and the only way to know which levers pay off is to model your own numbers across income tax, CGT and cash flow together.