Section 24 does something most tax rules do not: it taxes landlords on money they never keep. Mortgage interest leaves the account, the lender keeps it, and yet a slice of it sits in your taxable income attracting tax at 40% or 45% while only attracting relief at 20%. For a higher-rate landlord, that gap is the whole problem. A pension contribution is the cleanest legal lever still inside your control to close it, because it does the exact opposite of what Section 24 does to your tax band.
This guide sets out how the two interact in practice, with the figures that matter: what the restriction actually costs, how a contribution claws relief back at your real marginal rate, where the £60,000 allowance and carry forward help, the traps (the tapered allowance and the relevant-earnings cap that catches full-time landlords), and how the picture shifts under the 2027 property rates and Making Tax Digital.
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What Section 24 actually does to your tax bill
Before April 2017, mortgage interest was an ordinary expense: you deducted it from rental income and were taxed on the net profit. Section 24 (the finance cost restriction in ITTOIA 2005 s.272A) phased that out over four years and replaced it with a basic-rate tax reducer under s.274A. Since 6 April 2020 the rule has been fully in force: finance costs are added back to your taxable rental profit, and you receive a separate tax reduction worth 20% of the lower of your finance costs, your property profits, or your income above the personal allowance.
The label "20% credit" hides the damage. The interest is added to your income first, and only then is the flat 20% reduction applied. So a higher-rate landlord is taxed on the interest at 40% and given back 20%, a net cost of 20 points on every pound of mortgage interest. Worse, the add-back inflates your headline income, which can drag you into the higher-rate band, trigger the High Income Child Benefit Charge, or taper your personal allowance above £100,000, none of which the old deduction did. Our complete guide to finance costs under Section 24 walks through the mechanics, and how Section 24 can push you into the higher-rate band covers the band-creep risk in detail.
A worked example: the cost of the restriction
Take a landlord with a £55,000 salary and a portfolio producing £24,000 of rental income before interest, with £18,000 of mortgage interest. Net economic profit from the property is £6,000. Under the old rules they would have been taxed on £6,000 of rental profit. Under Section 24 they are taxed on the full £24,000 (added to the £55,000 salary), then given a £3,600 tax reducer (20% of the £18,000 interest).
The £24,000 sits entirely in the higher-rate band on top of the salary, so it attracts £9,600 of tax (40%). The reducer returns £3,600. Net tax on the property is £6,000, against real profit of £6,000, an effective rate of 100% before you even count the personal allowance and band effects. That is the Section 24 squeeze in one line, and it is why the rest of this guide exists.
Why a pension contribution is the natural counter
A personal pension contribution moves your tax band in the opposite direction to Section 24. You pay in from taxed income; the scheme adds 20% basic-rate relief at source; and if you are a higher or additional-rate taxpayer you reclaim the further 20% or 25% through your Self Assessment return. Critically, the gross contribution extends your basic-rate band by the same amount, which is the part that directly undoes Section 24 band-creep.
- Full relief at your marginal rate, not the restricted 20% Section 24 gives on interest.
- Your basic-rate band stretches by the gross contribution, so income the add-back pushed into 40% can fall back to 20%.
- Adjusted net income falls pound for pound, which can reinstate a tapered personal allowance above £100,000 (an effective 60% rate band).
- The money stays invested for retirement rather than disappearing as tax.
Return to the landlord above. Their total income is £79,000 (£55,000 salary plus £24,000 rental). Suppose they make a £20,000 gross personal pension contribution (£16,000 net, grossed up in the scheme). Their basic-rate band extends from £50,270 to £70,270, so £20,000 of income that was taxed at 40% is now taxed at 20%: a £4,000 income tax saving on top of the basic-rate relief already in the pension. The Section 24 reducer is unchanged, but far less of the rental income is now caught at the higher rate. The contribution has, in effect, neutralised much of the band-creep Section 24 created.
The trap most landlords miss: rental profit is not relevant earnings
Here is the single most common mistake in landlord pension planning. Tax-relievable personal contributions are capped at the higher of £3,600 gross and 100% of your relevant UK earnings. Relevant earnings means employment income and trading profits. Rental profit is property income, not relevant earnings. So a full-time landlord with £80,000 of rental profit and no salary cannot personally contribute £60,000 with relief; their ceiling is £3,600 gross.
This is why the strategy splits cleanly by landlord type:
| Landlord situation | Personal contribution headroom | Best lever |
|---|---|---|
| Employed plus a property portfolio | Up to salary (subject to £60,000 cap and carry forward) | Personal contribution to extend basic-rate band |
| Self-employed trade plus property | Up to trading profits (subject to cap and carry forward) | Personal contribution against trading income |
| Full-time landlord, no other earnings | £3,600 gross only | Company structure with employer contributions |
| Portfolio already in a limited company | Employer contribution not capped by personal earnings | Employer pension contribution, deductible against company profit |
If your income is genuinely earned alongside the property, the pension route is open. If you are a pure landlord, the realistic pension lever runs through a company, which is where Section 24 and incorporation start to converge.
The £60,000 allowance, carry forward and the tapered allowance
For 2025/26 the annual allowance is £60,000, or 100% of relevant earnings if lower. Carry forward lets you use unused allowance from the previous three tax years, provided you were a pension scheme member in each of those years. You use the current year first, then the oldest unused year. This is genuinely useful for landlords because rental income is lumpy: a rent review, a new acquisition, or a year where finance costs spike your tax band can all be partly absorbed by a larger one-off contribution. But carry forward only lifts the allowance ceiling; the contribution is still capped at 100% of your relevant earnings for the year you actually pay it, so it helps most where earned income is high.
The counterweight is the tapered annual allowance. Once adjusted income exceeds £260,000 and threshold income exceeds £200,000, the £60,000 allowance reduces by £1 for every £2 of adjusted income over £260,000, down to a £10,000 floor. Rental profit feeds both income tests, so a landlord with a substantial portfolio and a good salary can find the allowance restricted exactly when they most want to contribute. Model the adjusted and threshold income figures before paying in, because an excess contribution is taxed back through an annual allowance charge that can wipe out the benefit.
Timing the contribution
Contributions are relieved against the tax year in which they are paid, so timing matters. The years to prioritise a larger contribution are the ones where Section 24 has done the most damage: a year of high rental profit, a year you complete a property sale and the gain stacks your income, or a year the interest add-back has tipped you over £100,000 and started tapering the personal allowance. Under Making Tax Digital you will see a higher-rate year forming through the quarterly updates, which gives you the months before 5 April to act rather than discovering the position at the filing deadline.
The company route: where Section 24 and pensions stop fighting each other
A limited company is outside Section 24 entirely. It deducts mortgage interest in full against profit taxed at corporation tax rates, and it can make employer pension contributions for a director that are not capped by the director's personal earnings and are deductible against company profit (subject to the contribution being a genuine commercial reward for the work done). For a full-time landlord locked out of meaningful personal contributions by the relevant-earnings rule, the employer contribution is often the only route to large tax-relieved pension funding.
| Factor | Personal pension (Section 24 landlord) | Company plus employer contribution |
|---|---|---|
| Mortgage interest | Restricted to 20% reducer (22% from April 2027) | Deducted in full against profit |
| Contribution cap | 100% of relevant earnings (rental profit excluded) | Not capped by personal earnings; wholly-and-exclusively test applies |
| Relief | Marginal rate via Self Assessment | Corporation tax deduction for the company |
| Set-up cost and friction | None; works inside current structure | Incorporating an existing portfolio can trigger CGT and SDLT |
| Profit extraction | Income already in your hands | Dividends or salary carry further personal tax |
The tables make the choice look binary, but in practice many landlords run both: a personal contribution against employed income now, while modelling incorporation separately for the longer term. Incorporation is not a quick fix. Transferring an existing portfolio into a company is a disposal for CGT and an acquisition for SDLT, and the reliefs that can mitigate this (section 162 incorporation relief, or genuine partnership incorporation) are heavily conditioned. Read our complete guide to buy-to-let limited companies and extracting money from a property company before assuming the company route is automatically better.
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SIPPs and property: what is and is not allowed
Landlords often ask whether they can simply move their buy-to-lets into a pension and escape Section 24 that way. You cannot. Residential property held in a registered pension is a taxable asset that triggers punitive unauthorised payment charges, so residential buy-to-let inside a SIPP or SSAS is off the table. What is permitted is commercial property: offices, shops, warehouses and similar. Rental income on commercial property held inside the wrapper is generally tax-free, the scheme can borrow up to 50% of net fund value to help fund a purchase, and a business owner can have their own trading premises owned by their pension. This is a genuine planning route for landlords with a commercial element to their portfolio, but it does nothing for a residential buy-to-let book.
What changes from April 2027, and what does not
Finance Act 2026 (Royal Assent 18 March 2026) introduced separate property income tax rates from 6 April 2027. For 2027/28 onwards, property income in England, Wales and Northern Ireland is taxed at 22% basic, 42% higher and 47% additional; only Scotland is carved out and continues to set its own rates on property income. In the same change, the Section 24 finance cost reducer rises from 20% to the new 22% property basic rate, so it tracks the basic rate rather than freezing behind it.
The practical reading is precise, and a lot of online commentary gets it wrong. For a basic-rate landlord, the 22% reducer matches the 22% rate on their property income, so no new wedge opens; their position is broadly unchanged. For a higher-rate landlord the reducer improves by two points (20% to 22%), but the gap between their 42% rate and the 22% reducer is still 20 points, the same wedge as today. So the case for full-marginal-rate pension relief is undiminished after April 2027 for higher and additional-rate landlords. Our analysis of the 2027 property tax rates and Section 24 relief sets out the band-by-band effect.
Making Tax Digital: timing your planning
Making Tax Digital for Income Tax is live from 6 April 2026 for landlords (and sole traders) with gross income over £50,000, dropping to £30,000 from 6 April 2027 and £20,000 from 6 April 2028. The threshold is gross income, not profit, so a landlord with £52,000 of rent and a slim margin is in scope. Quarterly updates do not change the pension rules, but they change what you can see and when: a higher-rate year becomes visible through the quarterly figures, giving you the runway to fund a pension before the 5 April deadline rather than reacting in January. Limited companies stay outside MTD for Income Tax altogether. Our MTD for landlords deadline guide covers who is in scope and how the quarterly cycle works.
Pensions, IHT and the 2027 estate change
One forward-looking point worth flagging while you plan. From 6 April 2027, unused defined-contribution pension funds are brought into the deceased's estate for inheritance tax. For landlords whose plan was to build pension wealth as an IHT-efficient legacy alongside a property estate, that calculus changes: a large pension plus a property portfolio can newly trigger the residence nil-rate band taper above £2 million. This does not undermine the income tax case for funding a pension against Section 24, but it does mean the contribution should be sized with the whole estate in view, not just this year's tax bill.
How a landlord should sequence this
The order of operations matters more than any single figure. First, calculate your actual tax position with the Section 24 add-back in, including whether it crosses the £50,270 higher-rate threshold or the £100,000 personal allowance taper. Second, confirm your relevant earnings, because that, not your rental profit, sets your personal contribution ceiling. Third, check carry forward availability and the tapered allowance if your income is high. Fourth, size the contribution to the band you want to recover (the basic-rate band, the personal allowance, or both). Only then consider whether incorporation should sit alongside the pension for the longer term.
For the underlying Section 24 numbers, the step-by-step Section 24 tax credit calculation shows exactly how the reducer is worked out, and former furnished holiday let owners should read how FHL abolition affected pension contributions, because the loss of FHL relevant-earnings status from 6 April 2025 closed a route some landlords previously relied on.
Section 24 and pension planning interact through the tax bands in ways that are specific to your income mix, your earned income, your portfolio size and your retirement horizon. The figures here show the mechanics; the right contribution for you depends on numbers only your own return reveals. If you want this modelled against your actual position, our partner firms can run the calculation and set out the options.