Section 24 stops individual residential landlords deducting mortgage interest and other finance costs from their rental profit. Instead, you declare the full rent, pay income tax on the larger profit figure, and receive a basic-rate (20%) tax credit. It is named after section 24 of the Finance (No. 2) Act 2015, and from 6 April 2027 the credit rises to 22%.
That single change, from deducting interest to crediting it at a flat rate, is what hits higher-rate landlords hardest. This guide explains the mechanism itself: how the restriction works, the cap on the credit, who is actually affected, and the threshold traps that catch people out. For where to enter the figures on your return, or which costs count as finance costs, we point you to the right page rather than repeat it here.
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What is Section 24, and why is it called that?
The name is an accident of drafting. The restriction was introduced by clause 24 of the Finance (No. 2) Bill 2015, which on enactment became section 24 of the Finance (No. 2) Act 2015, headed "Relief for finance costs related to residential property businesses". Landlords still call it Section 24 (or sometimes clause 24), even though the operative wording now sits in section 272A of the Income Tax (Trading and Other Income) Act 2005.
Section 272A is the part that does the damage: it provides that a deduction is not allowed for the costs of a dwelling-related loan in calculating the profits of a property business. In plain terms, your mortgage interest is no longer an expense. The relief is given back, in a limited form, as a tax reducer under sections 274A and 274AA of the same Act.
It was phased in over three years: relief on 75% of finance costs in 2017/18, 50% in 2018/19, 25% in 2019/20, and full restriction from 2020/21 onwards. We are now several years past the transition, so for any current return the rule applies in full.
Section 24 catches individuals, partnerships and trusts that let residential property. It does not catch limited companies, commercial property, or (until their abolition on 6 April 2025) furnished holiday lets. The costs it restricts are mortgage and loan interest, interest on loans to buy furnishings, and incidental costs of obtaining finance such as arrangement fees. For the full list of what does and does not count, see our finance costs under Section 24 guide.
How Section 24 works: the before-and-after
Before April 2017, mortgage interest was an ordinary deductible expense. A landlord with £20,000 of rent and £8,000 of interest was taxed on £12,000, and a higher-rate payer effectively got 40% relief on that interest. Under Section 24, the same landlord is taxed on the full £20,000 (less any non-finance costs), then receives a credit worth 20% of the £8,000 interest set against their bill. The relief has dropped from the marginal rate to a flat 20%.
The mechanical sequence matters because it is where the threshold traps come from. Your interest is added back into taxable profit first, which inflates your total income, and only then is the credit applied at the end. The credit cannot create a refund and it does not reduce the income used to test your tax band, your personal allowance or your child benefit.
| Item | Before Section 24 (pre-2017) | Under Section 24 (2026/27) |
|---|---|---|
| Treatment of mortgage interest | Deducted from rental profit | Not deducted; added back into profit |
| Relief mechanism | Full deduction at your marginal rate | 20% basic-rate tax credit |
| Effect on taxable income figure | Lower (interest removed) | Higher (interest left in) |
| Basic-rate landlord, net effect | Broadly neutral | Broadly neutral |
| Higher-rate landlord, net effect | 40% relief on interest | 20% relief: a 20-point wedge |
| Limited company | Full deduction before corporation tax | Unchanged: full deduction |
The credit is given through a specific box on the property pages of your return. We deliberately do not duplicate that walkthrough here; our guide to claiming mortgage interest relief on a rental property takes you through the entry line by line.
The three-part cap on the credit
The credit is not simply 20% of your interest. Under section 274AA ITTOIA 2005, it is the lower of three figures:
- 20% of your finance costs for the year (the headline figure most people expect).
- 20% of your residential rental profit before any finance costs are taken off.
- 20% of your total income above the personal allowance, that is, your taxable income for the year.
For most landlords the first figure is the lowest, so the cap never bites and they simply get 20% of their interest. The cap only matters when interest is large relative to profit, or where income is low. Take a heavily geared property that makes £4,000 profit before £6,000 of interest. The naive credit would be 20% of £6,000, or £1,200, but the cap restricts it to 20% of the £4,000 profit, or £800. The unrelieved £2,000 of interest is not lost: under section 274A ITTOIA 2005 it carries forward indefinitely and can generate a credit in a later year when there is enough profit to absorb it.
This carry-forward is one of the most overlooked features of the regime. If you have run loss-making or marginal years, you may have a stock of carried-forward finance costs that should still be feeding into your current credit. To model the cap on your own numbers, our Section 24 calculator runs the three-part test for you.
Worked example: a higher-rate landlord in 2026/27
Numbers make the wedge concrete. Take a landlord with £55,000 of employment income, plus a rental property producing £18,000 of profit before finance costs, with £9,000 of mortgage interest. We will ignore the personal allowance taper here (income is below £100,000) and keep the figures clean.
- Rental profit added to income: the full £18,000 goes into taxable income; the interest is not deducted.
- Tax on the rental slice: with £55,000 of employment income already in the higher-rate band, the £18,000 of rental profit is taxed at 40%, giving £7,200.
- Section 24 credit: the lower of 20% of £9,000 (£1,800), 20% of £18,000 profit (£3,600), and 20% of taxable income above the allowance (well over £1,800). The lowest is £1,800.
- Net tax on the property: £7,200 minus the £1,800 credit, so £5,400.
Under the pre-2017 rules the same landlord would have deducted the £9,000 interest, been taxed on £9,000 of net rental profit at 40% (£3,600), and paid £3,600. Section 24 therefore costs this landlord an extra £1,800 a year. That is exactly the 20-point wedge: 40% would-be relief minus the 20% credit, applied to £9,000 of interest.
The same landlord in 2027/28: the 22% reducer
From 6 April 2027, Finance Act 2026 (Royal Assent 18 March 2026), sections 6 and 7 with Schedule 1, introduces separate property income rates of 22%, 42% and 47% for England, Wales and Northern Ireland, and gives the Section 24 reducer at the new 22% basic rate instead of freezing it at 20%. Run the same landlord again:
- Rental profit: the £18,000 is now taxed at the higher property rate of 42%, giving £7,560.
- Section 24 credit: 22% of the £9,000 interest is £1,980 (still the lowest of the three figures).
- Net tax on the property: £7,560 minus £1,980, so £5,580.
The wedge is 42% minus 22%, which is 20 points, identical to the 40% minus 20% of 2026/27. The extra cash tax (£5,580 versus £5,400) comes from the higher headline rate on the rent, not from any widening of the Section 24 gap. This is the point the press coverage routinely gets wrong: the reducer rises in step, so no new basic-rate wedge opens.
| Tax year | Property income rates (England, Wales, NI) | Section 24 reducer | Basic-rate wedge | Higher-rate wedge | Additional-rate wedge |
|---|---|---|---|---|---|
| 2026/27 | 20% / 40% / 45% | 20% | 0 points | 20 points | 25 points |
| 2027/28 onwards | 22% / 42% / 47% | 22% | 0 points | 20 points | 25 points |
Scotland is carved out of these rates and keeps its own bands; the restriction mechanism still applies there. For the full picture of the new regime, see our guide to the 2027 property income tax rates for landlords and the applied analysis in 2027 property tax rates and Section 24 relief.
Who is actually affected
It helps to separate the headline effect of the credit from the knock-on effect of the inflated income. Basic-rate landlords are largely unaffected by the credit arithmetic itself: they pay 20% on the rent and get 20% back, so the net position mirrors the old rules. The risk for them is being tipped over a threshold. Because the full rent is now in their total income, a landlord who used to sit just inside the basic-rate band after deducting interest can be pushed into the higher-rate band by the gross figure.
Higher and additional-rate landlords carry the wedge directly. They are taxed at 40% or 45% (42% or 47% from 2027/28) on rental profit but relieved at only 20% (22% from 2027/28) on finance costs. The more geared the portfolio, the larger the gap in cash terms. Landlords with large interest bills and modest profits are the most exposed, and are also the group most likely to hit the three-part cap.
Limited companies sit entirely outside this. A company deducts interest in full before corporation tax, so Section 24 simply does not feature in its accounts. That asymmetry is why the rule reshaped the market towards corporate structures, and why incorporation is the first mitigation most landlords examine.
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The hidden threshold knock-ons
The part competitors tend to skip is what the grossed-up income does elsewhere in the tax system. Because the rent goes into total income before the credit, Section 24 can trigger charges that have nothing to do with property:
- The 60% effective marginal rate. Once adjusted net income passes £100,000, the personal allowance tapers away at £1 for every £2, fully gone by £125,140. Inside that band each extra pound of rent is effectively taxed at 60%, and the Section 24 credit does not unwind it.
- High Income Child Benefit Charge. The charge starts to claw back child benefit once income passes the relevant threshold. Extra rental profit on the income figure can drag a household into the charge even though the cash has been spent on interest.
- Student loan repayments. Repayments are assessed on income, so a higher reported figure can lift repayments even where your real profit after interest is unchanged.
- Making Tax Digital for Income Tax. MTD is now live and the qualifying-income test looks at gross income, not profit after interest. The threshold is £50,000 from 6 April 2026, dropping to £30,000 from 6 April 2027 and £20,000 from 6 April 2028. Because Section 24 keeps your gross rent in the frame, more landlords are inside MTD than the profit figures alone would suggest. Our Making Tax Digital for property income guide covers the timeline and the income test.
- Pension annual allowance. The annual allowance is £60,000, tapered for high earners. Inflated income can pull you into the taper, while pension contributions themselves are one of the cleaner ways to bring adjusted net income back down.
Section 24 in 2027/28 and beyond
It is worth restating the future position on its own, because it is the most common point of confusion. The Autumn Budget 2025 announced separate rates for property income, and Finance Act 2026 enacted them with Royal Assent on 18 March 2026. From 6 April 2027, property income in England, Wales and Northern Ireland is taxed at 22%, 42% and 47%, and Schedule 1 of the Act amends the finance-cost relief (including section 399B within the rate framework) so the reducer is given at 22%.
This is enacted law, not a proposal. Only Scotland is carved out; the suggestion that Wales sets its own property rates for 2027/28 is wrong, because the Welsh self-setting power in the Act is a future enabling provision not in force for that year. For a basic-rate landlord, the 22% reducer matches the 22% basic rate, so nothing new opens up. For higher and additional-rate landlords, the relief improves slightly (20% to 22%) but stays far below their headline rate, leaving the same 20 and 25-point wedges as today. The headline rate on rent rises, but the Section 24 gap does not widen.
Strategies to manage the impact
There is no switch that turns Section 24 off for an individual, but several levers reduce its bite. The right mix depends on your income, gearing and plans, and the costs of getting it wrong can outweigh the saving, so this is an area to model carefully rather than copy.
Incorporation. Transferring properties into a company removes them from Section 24 because companies deduct interest in full before corporation tax. The catch is the cost of getting there: capital gains tax on the transfer (residential rates of 18% and 24%, against a £3,000 annual exempt amount), stamp duty land tax at the higher rates, and corporation tax (19% small profits rate up to £50,000, 25% above £250,000, with marginal relief between) plus personal tax when you extract profits. Incorporation relief and the section 162 business test can defer the CGT, but only where the activity genuinely amounts to a business. Our buy-to-let limited company guide works through the decision, and our capital gains tax on property guide covers the transfer cost.
Spousal allocation. Where one spouse or civil partner pays a lower marginal rate, shifting beneficial ownership (and filing Form 17 for unequal jointly held property) can move rental profit into the lower band. This affects income and interest allocation together, so it needs to fit the wider picture.
Other allowable costs and carry-forward. Section 24 only restricts finance costs; repairs, insurance, letting fees and accountancy remain fully deductible, so keeping non-finance costs well evidenced still reduces taxable profit pound for pound. And if the cap has bitten in past years, make sure carried-forward finance costs are still feeding into your credit.
Common mistakes and misconceptions
Four beliefs cause most of the trouble. The first is that mortgage interest is still fully deductible: it is, but only for companies, not for individuals. The second is that Section 24 is being repealed: it is fully in force and there is no repeal in prospect. The third is that it does not affect higher-rate taxpayers: it is built precisely to limit higher-rate relief, so they are the ones it bites. The fourth, and the one rising in 2027, is that the reducer stays at 20%: it rises to 22% from 6 April 2027 in step with the new basic rate, which is why no new wedge opens. For the broader top-of-funnel walkthrough of who Section 24 hurts and the strategy choices, see our Section 24 tax relief complete guide.
When to get specialist advice
The mechanics of Section 24 are fixed, but how they land on you is not. If you are highly geared, sitting near the £100,000 taper or a benefit threshold, considering incorporation, or unsure whether the three-part cap is quietly reducing your credit, the figures repay a proper look. We work with individual landlords and portfolio investors to model the real impact and the realistic options, without the costly restructuring that some are pushed into too quickly.