Section 24 doesn't just restrict mortgage interest relief — it can artificially push landlords into higher rate tax brackets. This "threshold effect" means you might face 40% or even 45% tax rates on rental income that previously qualified for basic rate taxation at 20%.
The mechanism is straightforward but brutal. Under Section 24, your full rental income becomes taxable before any mortgage interest deduction. The mortgage interest then becomes a basic rate tax credit rather than a deductible expense. This increase in taxable income can push you over the section 24 higher rate threshold, triggering significantly higher tax bills.
How Section 24 Creates the Higher Rate Threshold Effect
Before Section 24, landlords could deduct mortgage interest from rental income when calculating taxable profits. A landlord earning £40,000 rental income with £15,000 mortgage interest would show £25,000 taxable rental profit.
Under Section 24, that same landlord now reports £40,000 taxable rental income. They receive a basic rate tax credit worth £3,000 (20% of £15,000 mortgage interest), but their taxable income has jumped from £25,000 to £40,000.
When combined with employment income or other sources, this increase often pushes landlords over the higher rate threshold of £50,270 for 2026/27. The result? They're now paying 40% tax on rental income that previously attracted only 20% tax.
Real Example: Getting Pushed Into Higher Rate by Section 24
Consider Sarah, a teacher earning £45,000 annually with one rental property:
- Rental income: £18,000
- Mortgage interest: £8,000
- Other allowable expenses: £2,000
Before Section 24, Sarah's taxable rental profit was £8,000 (£18,000 - £8,000 - £2,000). Combined with her salary, her total taxable income was £53,000 — just £2,730 into the higher rate band.
Under Section 24, Sarah's taxable rental income becomes £16,000 (£18,000 - £2,000 expenses only). Her total taxable income jumps to £61,000, pushing £10,730 into the higher rate band. She receives a £1,600 tax credit for mortgage interest (20% of £8,000), but still faces a significantly higher tax bill.
The Threshold Effect Gets Worse at Higher Income Levels
The threshold effect landlords experience becomes more severe with larger portfolios. Multiple properties mean more rental income and higher mortgage interest amounts, creating a compounding effect.
For landlords approaching the additional rate threshold of £125,140, the impact is even more dramatic. Not only do they face 45% tax rates, but they also start losing their personal allowance at £100,000 of adjusted net income.
The Personal Allowance Trap
Section 24 can push landlords into the "personal allowance taper" zone between £100,000 and £125,140. For every £2 of income above £100,000, you lose £1 of personal allowance. This creates an effective tax rate of 60% on income in this band.
A landlord with £95,000 of other income who shows £20,000 additional rental income due to Section 24 suddenly faces this punitive tax rate on £15,000 of that rental income (the amount above £100,000).
April 2027: Separate Property Tax Rates Make It Worse
From April 2027, property income faces separate tax rates of 22% (basic), 42% (higher), and 47% (additional) — higher than general income tax rates. This makes the threshold effect even more costly for landlords pushed into higher rate by section 24.
These higher rates apply only to property income, so crossing thresholds becomes more expensive. A landlord pushed from basic to higher rate will face 42% tax on their rental profits rather than the general 40% higher rate.
Strategies to Reduce the Section 24 Threshold Impact
1. Pension Contributions
Personal or employer pension contributions can reduce your adjusted net income, potentially keeping you below higher rate thresholds. The annual allowance is £60,000 for 2026/27, with carry-forward options from previous years.
For every £1 contributed to a pension, you reduce taxable income by £1. This can be particularly effective for landlords just pushed over thresholds by Section 24.
2. Gift Aid Donations
Gift Aid donations extend your basic rate band. If you donate £1,000 to charity, HMRC treats this as a £1,250 gross donation, extending your basic rate band by £1,250. This effectively moves £1,250 of income from higher rate (40%) to basic rate (20%) taxation.
3. Incorporation Into a Limited Company
Moving properties into a limited company structure eliminates Section 24 entirely. Companies can still deduct mortgage interest as a business expense, and corporation tax rates (19%-25%) are often lower than higher rate income tax.
However, incorporation involves transfer costs, potentially including capital gains tax and stamp duty. The numbers need careful analysis, particularly given the upcoming separate property tax rates. Our complete guide to buy-to-let limited companies covers the full considerations.
4. Spousal Income Splitting
If you're married or in a civil partnership, consider transferring property ownership to the lower-earning spouse. This can keep rental income in lower tax bands and avoid the Section 24 threshold effect.
You can transfer properties between spouses without triggering capital gains tax, making this a tax-efficient restructuring option.
Advanced Planning: Timing and Tax Year Management
Rental Income Timing
Consider the timing of rental income where possible. Quarterly rent payments due in March might be delayed until April to move income between tax years, potentially avoiding higher rate thresholds in high-income years.
Expense Acceleration
Bringing forward allowable expenses into high-income years can reduce the rental profit subject to higher rates. This might include:
- Property maintenance and repairs
- Professional fees and subscriptions
- Insurance premiums paid annually in advance
- Property management costs
Capital Expenditure Planning
While you can't deduct capital costs like new boilers or kitchen replacements against rental income, you can often claim capital allowances on certain items. Timing these purchases strategically can help manage tax liabilities.
The Calculation Process: Working Out Your Position
To understand if you're affected by the Section 24 higher rate threshold issue, follow this process:
Step 1: Calculate your total income including the gross rental income (before mortgage interest deduction)
Step 2: Check where this places you against the tax bands: - Basic rate: up to £50,270 - Higher rate: £50,271 to £125,140 - Additional rate: above £125,140
Step 3: Calculate your mortgage interest tax credit (20% of mortgage interest costs)
Step 4: Work out your tax liability using higher rates on the rental income, then deduct the mortgage interest credit
This process is complex, particularly with multiple properties. Our online calculators can help you model different scenarios and understand your position.
Professional Help: When to Get Advice
The threshold effects of Section 24 involve complex calculations and planning opportunities that many landlords miss. Consider professional advice if:
- Your total income is within £10,000 of any tax threshold
- You have multiple rental properties
- You're considering incorporation or restructuring
- You need help with pension or other tax planning strategies
A specialist property accountant can model different scenarios and help you understand the most tax-efficient structure for your circumstances. They can also ensure you're claiming all available deductions to minimize the Section 24 impact.
Looking Ahead: Planning for 2027 Changes
The introduction of separate property tax rates from April 2027 will make threshold management even more critical. The 2% premium on property income rates (22%, 42%, 47% vs standard rates of 20%, 40%, 45%) increases the cost of being pushed into higher bands.
Landlords should start planning now for these changes. This might involve:
- Accelerating incorporation decisions before 2027
- Reviewing pension contribution strategies
- Considering property disposals to reduce portfolio size
- Restructuring ownership between spouses
The key is understanding your position and planning ahead rather than reacting after the higher tax bills arrive.
Section 24 and MTD Compliance
From April 2026, landlords with gross rental income over £10,000 must comply with Making Tax Digital requirements. This quarterly reporting system will make it harder to manage income timing strategies, as HMRC will have real-time visibility of your rental income.
The combination of MTD reporting and Section 24 threshold effects makes accurate record-keeping and tax planning more important than ever. Our guide to Making Tax Digital for landlords covers the compliance requirements.
Taking Action on Section 24 Threshold Issues
The Section 24 higher rate threshold effect is a real problem affecting thousands of UK landlords. The key is recognizing whether you're affected and taking appropriate action.
Start by calculating your current position and modeling the impact of Section 24 on your tax liability. Consider the planning strategies outlined above, particularly pension contributions and spousal transfers for immediate relief, and incorporation for longer-term planning.
Given the complexity of the calculations and the upcoming changes to property taxation, professional advice is often worthwhile. The cost of advice is typically far outweighed by the tax savings available through proper planning and structure optimization.