How Section 24 Pushes Landlords Into the Higher Rate Threshold

Section 24 is usually described as a cut to mortgage interest relief, and it is. But the feature that actually generates the unexpected tax bills is subtler: the restriction changes where your rental income sits in the tax bands. Because your full gross rent is now added to taxable income before any interest is taken off, a landlord whose real cash profit has not moved an inch can suddenly find a chunk of income taxed at 40% instead of 20%. That is the threshold effect, and it is the reason a landlord can pay more tax in a year their portfolio earned exactly what it earned the year before.

This page explains the mechanism precisely, works a full example, shows the before-and-after side by side, and sets out the levers that genuinely reduce the damage. It also corrects a common piece of stale commentary about what happens from April 2027.

How Section 24 creates the higher rate threshold effect

Before the restriction (fully phased in from 6 April 2020), residential landlords deducted mortgage interest from rent like any other expense. Taxable rental profit was rent minus running costs minus interest. A landlord earning £40,000 of rent with £15,000 of interest and £5,000 of other costs declared £20,000 of profit, and only that £20,000 entered the tax bands.

Under Section 24, interest is no longer an expense. The same landlord now reports £35,000 of rental income (£40,000 rent less the £5,000 of non-finance costs), and the interest comes back only as a 20% basic-rate tax credit (a tax reducer), worth £3,000 on the £15,000 of interest for 2026/27. The cash profit is identical. The figure that hits the tax bands has jumped from £20,000 to £35,000.

Stack that on top of a salary and the problem becomes visible. The extra £15,000 of exposed income does not just get taxed; it can shunt other income across the £50,270 higher rate threshold. The credit is always given at the basic rate, so when the exposed rent is taxed at 40% you are relieved at only 20%. The gap between those two rates, applied to your interest, is the cost of being pushed up.

What the 20% credit is, and the cap that limits it

The finance cost reducer is not a deduction and it is not unlimited. For 2026/27 it is the lower of three figures, each taken at 20%:

• 20% of the 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 (your taxable income).

Where the cap restricts the credit, the unused finance cost carries forward indefinitely to a later year. The practical point is that low-profit, high-interest years can leave you unable to use the full credit, which sharpens the threshold problem rather than softening it.

Worked example: a teacher pushed into higher rate

Consider an anonymised but typical case. A teacher earns £45,000 of salary and owns one let property:

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

Under the old rules, taxable rental profit was £8,000 (£18,000 less £8,000 interest less £2,000 costs). Added to the £45,000 salary, total income was £53,000, with only £2,730 in the higher rate band.

Under Section 24, the rental figure entering the bands is £16,000 (£18,000 less the £2,000 of non-finance costs only). Total income becomes £61,000, with £10,730 now in the higher rate band. The teacher receives a £1,600 finance cost credit (20% of £8,000), but that credit is fixed at the basic rate even though the rental income is now being taxed at 40%. The result is a materially higher bill on an unchanged cash position.

Before and after Section 24, side by side

The clearest way to see the threshold effect is to compare the two regimes on the same figures.

Item	Old rules (interest deductible)	Under Section 24 (2026/27)
Salary	£45,000	£45,000
Gross rent	£18,000	£18,000
Non-finance costs	(£2,000)	(£2,000)
Mortgage interest treatment	Deducted (£8,000)	Not deducted; 20% credit instead
Taxable rental figure	£8,000	£16,000
Total taxable income	£53,000	£61,000
Income in higher rate band	£2,730	£10,730
Finance cost credit	None (interest already deducted)	£1,600 (20% of £8,000)
Cash profit on the property	£8,000	£8,000

Cash profit is the same in both columns. Taxable income is £8,000 higher under Section 24, and £8,000 more of it falls in the higher rate band. That, in a single table, is the threshold effect.

The personal allowance trap and the additional rate

The threshold effect does not stop at £50,270. For landlords with larger portfolios or higher salaries, Section 24 can drive income into two more punitive zones.

The first is the personal allowance taper between £100,000 and £125,140 of adjusted net income. Every £2 above £100,000 strips away £1 of personal allowance, producing an effective marginal rate of around 60% on that slice. Because Section 24 inflates income with gross rent, a landlord whose genuine profit is modest can be dragged into this band, and the 20% credit does nothing to reverse the lost allowance. If your income is anywhere near £100,000, this is the priority to manage; we set it out in full in our guide to the Section 24 personal allowance 60% tax rate trap.

The second is the additional rate above £125,140, taxed at 45% for 2026/27 while the credit stays at 20%, a 25 point wedge. Multi-property landlords reach this far sooner under Section 24 than under the old rules, because gross rent accumulates fast. Our £100k rental income portfolio case study walks through how a sizeable but leveraged portfolio crosses these thresholds.

How to reduce the Section 24 threshold effect

There is no way to make Section 24 disappear for a personally held property, but there are several established ways to stop it pushing you into a higher band. They divide into income-band management, ownership restructuring, and (for larger portfolios) incorporation.

Pension contributions

A personal pension contribution is the most direct lever against the threshold effect. It extends your basic rate band by the gross amount and reduces adjusted net income pound for pound, so income that Section 24 had pushed into higher rate can fall back into basic rate, and a landlord caught in the 60% trap can be lifted clear of it. The annual allowance is £60,000 for 2026/27, with carry-forward of unused allowance from the previous three tax years. The detailed interaction is in our guide to Section 24 pension contribution planning.

Gift Aid donations

Gift Aid works on the same principle as pension contributions: a £1,000 donation is treated as £1,250 gross and extends your basic rate band by £1,250, moving that slice of income from 40% back to 20%. It is less commonly modelled than pensions but it stacks usefully where a landlord is only marginally over a threshold and already gives to charity.

Spousal ownership and a Form 17 election

If you are married or in a civil partnership, transferring some or all of a property to a lower-earning spouse moves rental income into their lower bands. Transfers between spouses living together are made on a no gain, no loss basis for capital gains tax, so the restructuring itself is not a taxable disposal. For a property held in unequal shares, a Form 17 election lets the couple be taxed on their actual beneficial shares instead of the automatic 50/50 split. The catch to respect: finance costs must be apportioned on the same basis as the income, so you cannot declare income 75/25 while keeping the interest credit elsewhere. We cover the mechanics in our guide to splitting jointly owned property for Section 24 and the wider restructuring in shifting rental income to a spouse with Form 17.

Incorporation into a limited company

Moving properties into a limited company removes Section 24 entirely, because companies deduct mortgage interest in full before corporation tax. For a heavily geared portfolio held by a higher or additional rate landlord, the long-term saving can be substantial. It is not a quick fix: transferring property can crystallise capital gains tax at residential rates of 18% or 24% for 2026/27 and an SDLT charge on the company, unless reliefs such as Section 162 incorporation relief apply to defer the gain. The decision turns on gearing, property values, your marginal rate and how long you intend to hold. We compare the two routes head to head in Section 24 vs incorporation: which saves more tax, and the company route in full in our buy-to-let limited company guide and incorporating without triggering CGT.

Timing income and expenses

In a spike year, bringing forward deductible expenditure (advance insurance, planned repairs, professional fees) reduces the rental figure entering the bands, and shifting a rent receipt across the year-end can keep income out of a higher band in an unusually high year. This lever is weaker than it used to be: Making Tax Digital quarterly reporting gives HMRC near real-time visibility of gross rent, so aggressive year-end timing is both harder to do and easier to question.

A diagnostic: are you affected?

You can establish your exposure in four steps before involving an adviser.

Step 1. Add your salary, pension and other taxable income to your gross rental income before deducting any mortgage interest.

Step 2. Check the total against the 2026/27 bands: personal allowance to £12,570, basic rate to £50,270, higher rate £50,271 to £125,140, additional rate above £125,140.

Step 3. Multiply your finance costs by 20% to find your tax reducer, remembering the three-part cap.

Step 4. If the gross rent has moved you into a higher band, you are taxed at the higher rate on that slice but relieved at only 20% on the interest. That gap is your Section 24 wedge.

Our Section 24 calculator models this for you, and the wider mechanics sit in our complete guide to Section 24 tax relief. As a rule of thumb, take advice if your total income is within £10,000 of any threshold, you hold several geared properties, or you are weighing incorporation.

What changes from April 2027 (and what does not)

A great deal of online commentary claims the threshold effect is about to get dramatically worse. The reality is more measured, and getting it right matters.

From 6 April 2027, property income in England, Wales and Northern Ireland is taxed at separate rates of 22% basic, 42% higher and 47% additional (Finance Act 2026, Royal Assent 18 March 2026; Scotland is excluded and keeps its own rates). The same Act raises the Section 24 finance cost reducer to 22% in step, amending the relevant ITTOIA 2005 and ITA 2007 provisions. Because the reducer tracks the new basic property rate, no new basic-rate wedge opens: a basic-rate landlord taxed at 22% and relieved at 22% is in the same position relative to their interest as before.

For higher and additional rate landlords the reducer rises from 20% to 22%, a small improvement, but it still sits well below their 42% or 47% rate. The wedge is therefore 20 points (42 less 22) at higher rate and 25 points (47 less 22) at additional rate, the same size as the 2026/27 wedge of 20 and 25 points. So the threshold effect remains real and expensive, but it does not widen. The danger to plan for is being pushed into the 42% or 47% band in the first place, not a new wedge that does not exist. The detail is in our guide to the 2027 property income tax rates and to how the changes affect the incorporation decision.

Making Tax Digital and the threshold effect together

Making Tax Digital for Income Tax is now live and interacts directly with Section 24. From 6 April 2026 landlords with qualifying income above £50,000 must keep digital records and file quarterly updates; the threshold falls to £30,000 from 6 April 2027 and £20,000 from 6 April 2028. "Qualifying income" is gross rent plus gross self-employment turnover, tested against the relevant prior-year return, so the figure that triggers MTD is the same gross-rent figure that Section 24 taxes.

Two consequences follow. First, the income-timing lever weakens, because HMRC sees your rent quarterly rather than once a year. Second, clean digital records make it far easier to evidence the finance costs behind your 20% credit and to model whether a band-management move (pension, Form 17) is worth making before the year closes. Our guide to Making Tax Digital for landlords sets out the compliance steps.

Taking action

The threshold effect is the part of Section 24 that catches landlords by surprise, because the tax bill rises while the bank balance does not. The fix is rarely a single move; it is usually a combination of band management this year (pension or Gift Aid), ownership restructuring with a spouse where that fits, and a clear-eyed view on incorporation for a larger geared portfolio. Run your own numbers through the four-step diagnostic above first, then bring the figures to a specialist who can model the alternatives against your actual income, gearing and timeline. The 2027 rate changes do not move the goalposts as far as some commentary suggests, but they do reward landlords who plan their band position deliberately rather than discovering it on the return.