Section 24 Tax Credit: How Does the 20% Basic Rate Relief Actually Work?

Section 24 did not abolish mortgage interest relief for landlords. It changed the mechanism, and that one change is the source of almost every Section 24 surprise. Relief used to be a deduction from your rental income; it is now a credit applied against your tax bill, fixed at the basic rate of 20% for 2026/27. Most coverage tells you Section 24 exists. This page answers the narrower question that decides how much you actually pay: how the credit itself works, why a reducer off your tax is not the same thing as a deduction off your income, and why that switch is what halved relief for higher rate landlords.

If you want the step-by-step arithmetic, the band-creep effects for basic rate landlords, or the SA105 box, those each have their own guide and we link to them at the right moments below. Here we stay on the credit.

Deduction versus reducer: the switch at the heart of Section 24

Under the system in place until 2017, finance costs on a residential let were an allowable expense. You subtracted mortgage interest from rental income, arrived at a smaller profit, and were taxed on that profit at your marginal rate. Relief was therefore worth whatever rate you paid: 20p in the pound for a basic rate landlord, 40p for a higher rate landlord, 45p for an additional rate landlord.

Section 24 removed that deduction. ITTOIA 2005 s.272A, inserted by Finance (No. 2) Act 2015 s.24, now disallows finance costs as a deduction from residential property profits. In their place, ITTOIA 2005 s.274A gives an individual landlord a separate entitlement to relief, and s.274AA defines that relief as a tax reducer: a fixed amount subtracted from your income tax bill after the tax has been calculated.

The practical effect is that your taxable rental income is now larger (because nothing is deducted for interest), and a flat credit is handed back at the end. For a landlord whose marginal rate is 20%, those two changes cancel out. For everyone above the basic rate, they do not, and that asymmetry is the whole of Section 24's bite.

How the 20% reducer is computed

The reducer is not simply 20% of your mortgage interest, even though that is how it is usually described and how it works for most landlords. ITTOIA 2005 s.274AA defines it as the basic rate of income tax multiplied by the lowest of three figures:

• your relievable finance costs for the year (mortgage interest and certain incidental loan costs);
• your residential property business profits for the year, before any finance cost deduction;
• your adjusted total income that exceeds the personal allowance, in effect your taxable income.

For 2026/27 the basic rate is 20%, so in the ordinary case where your property profit and your taxable income both comfortably exceed your interest, the credit is 20% of the interest. The lower-of-three test only bites when finance costs are large relative to profit or to total taxable income, typically in a loss-making year or for a highly geared landlord with little other income. Where the test does bite, the credit is smaller, and the un-relieved portion is not lost: it carries forward indefinitely to be relieved in a later year. We keep the worked arithmetic of that cap out of this page on purpose; if you need to run your own figures through it, our step-by-step Section 24 calculation guide walks through each of the three limbs.

One consequence of the credit being a reducer matters for cash flow: it offsets income tax and nothing else. It cannot reduce National Insurance, Class 4 contributions, student loan repayments or the High Income Child Benefit Charge, all of which are driven by the larger, gross income figure that Section 24 creates.

Why the relief is capped at the basic rate, by design

The 20% ceiling is deliberate, written into statute, and not an HMRC discretion. When the restriction was legislated, the policy aim was to stop the tax system subsidising geared residential investment at the higher and additional rates and to level the field between landlords and owner-occupiers, who get no relief on their own mortgage interest. Capping relief at the basic rate was the mechanism chosen to do that.

Because the reducer is defined in s.274AA as the basic rate times your finance costs, the relief is locked to that rate. No claim, election or accounting treatment available to an individual landlord can lift it above the basic rate. The only way an individual changes the relief rate on residential interest is to change the structure that owns the property, which is why the limited company route comes up so often (more on that below).

Effective relief by tax band: where the credit halves

The clearest way to see what the reducer-versus-deduction switch does is to hold the interest constant and watch the relief change by band. The table below takes a single £10,000 of residential mortgage interest and shows the relief under the old full deduction, under the 2026/27 reducer, and under the enacted 2027/28 reducer. These are statutory relief figures on an illustrative interest amount, not fees.

Taxpayer band	Old relief (full deduction)	2026/27 relief (20% reducer)	Effective change	2027/28 relief (22% reducer)
Basic rate	£2,000	£2,000	No change	£2,200
Higher rate	£4,000	£2,000	Relief halved	£2,200
Additional rate	£4,500	£2,000	Largest absolute loss	£2,200

The middle column is the same for every band, and that is the entire story of Section 24 in one figure. The old deduction tracked your marginal rate; the reducer does not. A higher rate landlord who used to relieve £4,000 of a £10,000 interest bill now relieves £2,000, so the interest costs an extra £2,000 in tax even though nothing about the property has changed. An additional rate landlord loses £2,500 of relief on the same interest.

Take a concrete example. Priya is a higher rate taxpayer with £10,000 of buy-to-let mortgage interest and ample rental profit and other income, so the lower-of-three cap does not bite. Her reducer is 20% of £10,000, which is £2,000. Under the old rules she would have deducted the £10,000 from income and saved £4,000. The £2,000 gap is her Section 24 cost on the interest, and it does not depend on how much rent she earns; it depends only on the interest figure and the fixed reducer rate.

For why a basic rate landlord can still end up worse off in practice, despite the table showing no change in the relief rate, see our dedicated guide on Section 24 and basic rate taxpayers: adding the gross rent back into income before the credit can tip you over the higher rate threshold even when your relief rate is unchanged.

Does the 20% credit rise to 22% in 2027?

It does, and this is now enacted law rather than a proposal. From 6 April 2027, property income is taxed at separate rates of 22% basic, 42% higher and 47% additional, under Finance Act 2026 (Royal Assent 18 March 2026, ss.6 to 7). Finance Act 2026 Schedule 1 moves the Section 24 reducer onto the new property basic rate of 22% in step, by amending ITTOIA 2005 s.274AA so that the reducer is computed at the property basic rate rather than a fixed 20%.

The 22% reducer applies to property income in England, Wales and Northern Ireland for 2027/28. Only Scotland is carved out, because Scottish taxpayers pay rates set at Holyrood; the reducer then interacts with those Scottish rates. The separate power for Wales and Scotland to set their own property income rates is a future enabling provision and is not in force for 2027/28, so for that year Wales is firmly inside the 22/42/47 framework.

The key point for landlords is that the change does not open a new tax wedge. Because the reducer rate moves with the property basic rate, a basic rate landlord still sees the 22% relief match the 22% rate on their property income, so their position is unchanged in principle. A higher or additional rate landlord gets a slightly better reducer (22% rather than 20%), but their property income rate also rises to 42% or 47%, so the gap between what they pay and what they get back stays the same as in 2026/27. The reducer does not freeze at 20%, and no fresh basic-rate wedge appears.

Which finance costs the reducer applies to

The reducer covers the finance costs of a residential property letting business. In practice that means buy-to-let mortgage interest, interest on loans used to buy or improve a let residential property, and the incidental costs of obtaining that finance, such as certain arrangement fees. Only the interest element of a repayment mortgage qualifies; capital repayments carry no relief at all.

Two boundaries matter. Interest on a commercial property mortgage is outside Section 24 and remains fully deductible against that letting's profits, so it is relieved at the marginal rate. And former furnished holiday lets are now inside Section 24: with the FHL regime abolished from 6 April 2025, what used to be an unrestricted deduction is now relieved through the basic rate reducer like any other residential let. For a fuller taxonomy of what counts as an allowable finance cost, see our complete guide to finance costs under Section 24, and for the wider list of deductions that still come off rental profit in full, our guide to landlord tax deductions.

How you actually receive the relief

Mechanically, the reducer is applied at the income tax computation stage, after your income tax has been worked out on the full figures. On a Self Assessment return the residential finance costs go in the dedicated residential finance costs box on the SA105 property pages, not in the expenses section. HMRC then calculates the reducer under s.274AA and subtracts it from the tax due. If you want the box-by-box reporting steps, our guide on claiming mortgage interest relief on a rental property under Section 24 sets them out in detail. The wider mechanism, including how the restriction fits into the rest of your property tax, is covered in the Section 24 mortgage interest restriction guide.

From April 2026, Making Tax Digital for Income Tax begins phasing in (qualifying income over £50,000 first, then £30,000 from April 2027 and £20,000 from April 2028), which means quarterly digital records of rental income and finance costs. Clean records of the interest figure feeding the reducer become more important under that regime; our note on the Making Tax Digital deadline for landlords covers the timeline.

The one structure that changes the relief rate

Because Section 24 is an income tax rule, it does not apply to companies. A limited company deducts mortgage interest in full before Corporation Tax, so within a company the interest is relieved at the Corporation Tax rate rather than capped at the basic rate reducer. That is the only route that genuinely lifts an individual's residential interest above 20% relief, and it is why incorporation is the most-discussed Section 24 response.

It is not a free win. Moving property into a company can trigger SDLT on the transfer and CGT on the gain, you then pay Corporation Tax on company profits and personal tax to extract them, and there are ongoing compliance obligations. Whether it pays depends on your income, gearing, portfolio size and time horizon. Our complete guide to buy-to-let limited companies sets out the trade-offs, and if you would rather have the numbers run for your own situation, that is exactly the kind of work a property accountant does.

For the full policy history and the broader picture of Section 24, including its phased introduction from 2017, see our complete guide to Section 24 tax relief.