Section 24 and the 60% Tax Trap: How Landlords Lose Their Personal Allowance

Section 24 is usually explained as a restriction on mortgage interest relief, and it is. But its sharpest edge is indirect. By adding your mortgage interest back to taxable income, Section 24 can lift a landlord's reported income across £100,000, where the personal allowance starts to disappear. Cross that line and a 60% effective tax rate opens up on income between £100,000 and £125,140, an effect that hits even though your actual cash profit has not changed by a penny. This is the trap that catches geared higher earners, and it is almost entirely avoidable with the right planning.

Why Section 24 inflates your taxable income

Until the rules were phased in between 2017 and 2020, residential landlords deducted mortgage interest as an ordinary business expense, so only net rental profit was taxed. Section 24 (now in Income Tax (Trading and Other Income) Act 2005, sections 272A and 274A) removed that deduction for residential lettings. The interest is added back to profit, the higher figure is taxed at your marginal rate, and you receive a basic-rate tax credit of 20% of the interest at the end of the calculation.

Consider a landlord with £60,000 of rents and £30,000 of mortgage interest:

Position	Taxable rental income	Relief for interest
Before Section 24	£30,000 (£60,000 rents less £30,000 interest)	Full deduction at marginal rate
Under Section 24	£60,000 (interest not deductible)	£6,000 basic-rate credit (20% of £30,000)

The reported income is £30,000 higher under Section 24, even though the cash position is identical. For a landlord with other income, that £30,000 is exactly what can carry total income from comfortably under £100,000 to well inside the personal allowance taper. The deeper mechanics of the add-back and the credit are covered in our complete guide to Section 24 tax relief and our walkthrough of how to claim mortgage interest relief on rental property.

How the personal allowance taper builds the 60% rate

The personal allowance for 2026/27 is £12,570. Once adjusted net income exceeds £100,000, the allowance is reduced by £1 for every £2 of income above that threshold, and it reaches nil at £125,140 (£100,000 plus twice £12,570). The 60% rate is not a separate band you will see itemised anywhere. It is the combined effect of two things happening at once on each pound earned in that range:

• 40% higher-rate tax on the pound of income itself.
• Loss of 50 pence of personal allowance, which is no longer shielding income lower down, so that 50 pence is now taxed at 40%, adding 20 pence of tax.

Forty pence plus twenty pence is sixty pence of tax on every pound between £100,000 and £125,140. Above £125,140 the allowance is fully gone and the marginal rate drops back to the ordinary 40% (or 45% once you pass £125,140 into the additional rate). That is the cruel shape of it: the rate is worst in the middle, not at the top.

The point that trips landlords up is which income figure the taper uses. The £100,000 test looks at adjusted net income, broadly taxable income after gross pension contributions and Gift Aid. The Section 24 basic-rate credit is not a deduction from income. It is applied to the tax bill right at the end, so it reduces the tax you pay but does nothing to pull your income back below £100,000. The add-back pushes you in; the credit cannot pull you out.

Worked example: the same profit, a very different tax bill

Priya works as a contractor and holds three buy-to-let properties personally. Her position for 2026/27, with rents that have risen over a couple of years, looks like this:

• Employment income: £55,000
• Rental income: £68,000
• Mortgage interest: £20,000
• Other allowable rental expenses: £8,000

Her actual cash rental profit is £40,000 (£68,000 less £20,000 interest less £8,000 expenses). But Section 24 will not let her deduct the £20,000 interest from income. The table below sets the world that Section 24 abolished against the one she actually lives in.

Measure	Old rules (interest deductible)	Section 24 (interest added back)
Rental profit in taxable income	£40,000	£60,000
Total income (with £55,000 salary)	£95,000	£115,000
Personal allowance retained	Full £12,570	£5,070
Income in the 60% band	None	£15,000 (£100,000 to £115,000)
Basic-rate interest credit	Not applicable	£4,000 (20% of £20,000)

Under the old rules Priya's £115,000 of gross income nets to £95,000 of taxable income, she keeps her full allowance, and no part of her income touches the taper. Under Section 24 the same economic profit produces £115,000 of taxable income. The £15,000 sitting between £100,000 and £115,000 is taxed at the 60% effective rate, and her personal allowance has more than halved to £5,070 (£12,570 less half of the £15,000 excess). The £4,000 credit softens the bill but, crucially, leaves the £115,000 income figure, and therefore the lost allowance, exactly where it is. Her cash profit is identical in both columns; the tax outcome is not.

Pension contributions: the cleanest way out

For most affected landlords the single most effective response is a personal pension contribution, because it reduces adjusted net income directly. A gross contribution comes off the very figure the £100,000 taper measures, so it does double duty: it attracts higher-rate relief and it restores personal allowance.

Take Priya. A gross pension contribution of £15,000 brings her adjusted net income from £115,000 back to £100,000. The whole of that contribution sits inside the 60% band, so it saves tax at 60%: £9,000 of tax relief on a £15,000 gross contribution. After basic-rate relief is added at source and higher-rate relief is reclaimed through self assessment, the net cost of putting £15,000 into her pension is around £6,000. She has also recovered her full £12,570 allowance. Few other reliefs give a 60p-in-the-pound return.

Two cautions. The contribution must be within your available annual allowance (£60,000 for 2026/27 for most people, though high earners can have it tapered and unused allowance from the previous three years can be carried forward). And the relief is only worth 60% on the slice of contribution that actually falls inside the taper band; contributions beyond £125,140 of income revert to ordinary higher-rate relief. The mechanics of using a property company to make employer contributions are set out in our note on employer pension contributions for property company directors.

Spousal income splitting

Where property is owned jointly with a spouse or civil partner, moving more of the rental profit to the lower earner can keep the higher earner under £100,000 altogether. Married couples and civil partners are taxed on rental income in line with their beneficial ownership, and for property held in unequal shares a Form 17 election (supported by a declaration of trust) tells HMRC to tax the actual split rather than the automatic 50:50 default.

If Priya's spouse is a basic-rate taxpayer, shifting a meaningful share of beneficial ownership lifts profit out of her 60% band and taxes it at 20% in their hands. The election must reflect genuine ownership, not a paper arrangement that leaves the economic reality unchanged, and it cannot be applied retrospectively to income that has already arisen, so this is planning to set up before the rents come in, not after.

Incorporation: removing the cause

The taper exists because Section 24 inflates personally taxed income. A limited company is outside Section 24 entirely: it deducts mortgage interest in full against profit before corporation tax, so there is no add-back, no artificial inflation, and nothing to push a shareholder over £100,000 on the rental side. For a heavily geared higher-rate landlord that is the most complete fix available.

It is also the most involved. Transferring personally held property into your own company is a disposal at market value for capital gains tax, charged at 18% or 24% on residential gains after the £3,000 annual exempt amount, and the company normally pays the 5% additional-dwellings SDLT surcharge on the way in. Section 162 incorporation relief can defer the CGT where you transfer a genuine property business as a going concern in exchange for shares, but HMRC tests whether the lettings are a business rather than passive investment. Our complete guide to buy-to-let limited companies works through when the numbers stack up and when they do not.

Lever	Best suited to	What it changes	Watch out for
Pension contribution	Higher earners with annual allowance to spare	Cuts adjusted net income, restores allowance, relief at 60% in the band	Annual allowance limits; money locked until pension age
Spousal income split	Married or civil-partnered joint owners	Moves profit to a lower-rate spouse, keeps you under £100,000	Must reflect real ownership; set up before income arises
Incorporation	Geared portfolios held for the long term	Removes the add-back entirely; full interest deduction in the company	CGT and SDLT on transfer; ongoing company costs
Timing of income and repairs	Landlords near the threshold	Spreads income or brings deductible costs into a high-income year	Only useful at the margin; will not fix a structural problem

Timing income and expenses around the threshold

If you are sitting just over £100,000, smaller adjustments can matter. Bringing forward a deductible repair into a high-income year, deferring a rent review by a few weeks across a year end, or realising a chargeable event in a lower-income year can each pull adjusted net income back under the line. These are marginal tools, useful when you are a few thousand pounds over, not a substitute for the structural fixes when the add-back is large and recurring. Repairs must be genuine revenue repairs to be deductible; capital improvements are not allowable against rental profit.

The other cliffs at £100,000 and £60,000

The personal allowance taper rarely travels alone. Crossing £100,000 of adjusted net income, or moving up through the £60,000 to £80,000 range, can switch off several other reliefs at the same time:

• Tax-Free Childcare and 30 hours funded childcare: both are lost once either parent's adjusted net income exceeds £100,000, a genuine cliff edge that can cost thousands per child.
• High Income Child Benefit Charge: Child Benefit is clawed back between £60,000 and £80,000 of adjusted net income, fully recovered by £80,000.
• Marriage Allowance: unavailable once either spouse becomes a higher-rate taxpayer.

For a working parent of young children, the Section 24 add-back that tips income over £100,000 can therefore strip the personal allowance and the childcare support together, producing an effective marginal rate well beyond 60% on a narrow band of income. That stacking is exactly why a pension contribution that brings income back under £100,000 can be worth far more than the headline 60% relief alone.

What changes in 2027, and what does not

From 6 April 2027 property income is taxed at its own rates of 22% basic, 42% higher and 47% additional, two points above the general income tax rates, under Finance Act 2026 (Royal Assent 18 March 2026). These property rates apply to landlords in England, Wales and Northern Ireland; only Scottish taxpayers sit outside the new structure, because their property income follows Holyrood-set rates. The Section 24 mortgage interest credit rises to 22% in step with the new basic rate, so the credit and the rate move together and no new wedge opens between them.

What does not change is the personal allowance taper. The £100,000 to £125,140 mechanism is untouched by the 2027 reforms, so the 60% trap survives intact, and because rental income above the threshold is now taxed two points higher, the add-back is marginally more expensive than before. The strategic picture for a geared higher-rate landlord is the same conclusion the 2027 rates reinforce across the board: holding leveraged residential property personally is getting structurally more expensive. Our analysis of the 2027 property income tax rates for landlords sets out the full picture.

Seeing it coming under Making Tax Digital

Making Tax Digital for Income Tax does not alter the Section 24 rules, but it changes how early you can spot the trap. From 6 April 2026 landlords with qualifying income above £50,000 must keep digital records and file quarterly updates, with the threshold dropping to £30,000 from April 2027 and £20,000 from April 2028. Qualifying income is measured on gross rents before the interest add-back, so a geared landlord can be inside MTD with quite modest net profit. The silver lining is visibility: quarterly figures surface a looming £100,000 crossing while there is still time to make a pension contribution or rebalance ownership before the tax year closes, rather than discovering the 60% band in the following January's tax bill. Our complete guide to Making Tax Digital for property income covers the reporting mechanics.

Records to keep and when to get advice

The calculations that decide whether you are in the taper are unforgiving about detail, so keep clean records of mortgage interest certificates, all rental income and expenses, employment and other income, and pension contribution evidence. The figure that matters is adjusted net income, and reconstructing it accurately after the year has ended is far harder than tracking it as you go.

If your combined income is approaching £100,000, or you suspect the Section 24 add-back is quietly carrying you into the taper, this is a position to model in advance rather than discover in arrears. A property accountant can calculate your adjusted net income, show how much pension contribution or income splitting brings you back under the line, and weigh whether incorporation is the right long-term answer for the shape of your portfolio. The planning generally has to be in place before the tax year ends, which is the real reason landlords get caught: by the time the trap is visible on a return, the year it relates to is already closed.