If your portfolio throws off around £50,000 of rent and most of it is mortgaged, Section 24 is probably the single biggest reason your tax bill no longer matches your bank balance. This worked example takes a realistic three-property landlord, runs the numbers line by line, and shows exactly where the extra tax comes from, why it can drag you into the 40% band, and which planning routes actually move the figure rather than just sounding clever.
We use round, defensible numbers throughout so you can map them onto your own position. The mechanics are the same whether your rents total £30,000 or £100,000; only the band-stacking changes.
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The example portfolio: a £50k rental income landlord
Our landlord, Priya, owns three buy-to-let properties and earns £35,000 from employment alongside the rents. The portfolio looks like this:
- Property 1: two-bed flat in Manchester, £18,000 annual rent, £240,000 interest-only mortgage at 5.0%.
- Property 2: three-bed house in Birmingham, £20,000 annual rent, £280,000 mortgage at 5.5%.
- Property 3: two-bed house in Leicester, £12,000 annual rent, £140,000 mortgage at 5.5%.
Total gross rent is £50,000. Total annual mortgage interest is £35,100 (£12,000 + £15,400 + £7,700 across the three loans). Allowable running costs (insurance, repairs, letting-agent fees, accountancy) come to £3,200. Priya is the textbook "accidental higher-rate" landlord: a £35,000 salary that on its own sits well inside the basic-rate band, and a geared portfolio that under the old rules still left her a basic-rate taxpayer, but that Section 24 tips into the 40% band by taxing the rent gross and refusing the interest deduction.
What Section 24 actually does to the calculation
Before April 2017, mortgage interest was an ordinary expense of the property business. You deducted it from rents, taxed the profit, and that was that. Section 24 (now in ITTOIA 2005 s.272A and the finance-cost reducer in s.274A) removed the deduction in stages and replaced it, since 2020/21, with a flat 20% tax credit on the interest. The interest still earns relief, but only at the basic rate, no matter what rate you actually pay on the rest of your income.
That single change does two things at once. It inflates your taxable income by the interest you genuinely paid, and it caps the relief on that interest at 20%. For a basic-rate taxpayer those two effects roughly cancel. For anyone pushed into the higher-rate band, they do not, and the gap is the cost of Section 24.
Pre vs post Section 24: the figures side by side
Here is the same landlord under the old full-deduction system and under the current rules. We isolate the tax attributable to the property income so the comparison is clean.
| Step | Old rules (full deduction) | Current Section 24 rules |
|---|---|---|
| Gross rent | £50,000 | £50,000 |
| Less running costs | (£3,200) | (£3,200) |
| Less mortgage interest | (£35,100) | not deducted |
| Taxable property profit | £11,700 | £46,800 |
| Plus employment income | £35,000 | £35,000 |
| Total income | £46,700 | £81,800 |
| Less personal allowance | (£12,570) | (£12,570) |
| Taxable income | £34,130 | £69,230 |
| Income tax before reducer | £6,826 | £20,152 |
| Less 20% finance-cost reducer | n/a | (£7,020) |
| Income tax after reducer | £6,826 | £13,132 |
Figures use the 2026/27 personal allowance of £12,570 and a basic-rate band of £37,700 of taxable income (the higher rate starts at £50,270 of gross income). Under the old rules her £34,130 of taxable income sits entirely within the basic-rate band, so the tax is a flat 20%, giving £6,826. Under Section 24 her taxable income is £69,230: 20% on the first £37,700 (£7,540) plus 40% on the remaining £31,530 (£12,612) gives £20,152, less the £7,020 reducer (£35,100 × 20%), which leaves £13,132.
Reading the result
The extra tax is £13,132 minus £6,826, which is £6,306 a year, and in this comparison every penny of it is caused by Section 24, because nothing else changes between the two columns. The mechanism is simple. Under the old rules her £35,100 of interest was deducted and saved tax worth £13,326 (most of it at 40%, because removing the deduction would have lifted her well into the higher-rate band). Section 24 replaces that deduction with a flat 20% credit of £7,020. The £6,306 gap between £13,326 of old relief and £7,020 of new credit is the cost of the rules, and it falls on a landlord whose cash position has not improved by a penny.
The higher-rate trap, in plain terms
Notice what happened to Priya's band position. Under the old rules her taxable income was £34,130 and her gross income £46,700, comfortably below the £50,270 higher-rate threshold, so she was a basic-rate taxpayer. Under Section 24 her taxable income is £69,230 and £31,530 of it is taxed at 40%. The interest she paid did not change; the way it is counted did.
This is why "can Section 24 push you into the higher-rate band" is the most important question a geared landlord can ask. Once you cross £50,270 the knock-on effects stack up:
- Any additional income (a bonus, a second job, savings interest) is taxed at 40% rather than 20%.
- The High Income Child Benefit Charge starts to bite from £60,000 of adjusted net income.
- Above £100,000 the personal allowance tapers away at £1 for every £2, an effective 60% marginal rate on that slice.
- Pension annual allowance and savings allowances start to shrink.
We cover the threshold mechanics in more depth in can Section 24 push you into higher-rate tax, and the basic-rate position in Section 24 for higher-rate taxpayers.
The cash flow squeeze
Tax on paper is one thing; tax paid out of rents already promised to a lender is another. Here is Priya's monthly position on the assumption her mortgages are interest-only (the harshest and most common case for geared portfolios):
| Monthly item | Amount |
|---|---|
| Rental income | £4,167 |
| Less mortgage interest | (£2,925) |
| Less running costs | (£267) |
| Less Section 24 extra tax | (£526) |
| Cash left before base income tax | £449 |
The £526 a month is the cost of Section 24 alone, the extra tax versus the old deduction system, and it sits on top of the mortgage and running costs (the base income tax on the profit is separate again). For a highly geared, interest-only landlord like Priya, where £2,925 of every £4,167 of monthly rent goes straight to the lender, the restriction charges tax on profit that barely exists in cash terms once the interest is paid. That is the structural unfairness landlords complain about, and it is why "Section 24 cash flow" searches spike whenever interest rates move.
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What changes in April 2027
Finance Act 2026 (Royal Assent 18 March 2026) introduced separate rates for property income from 6 April 2027. Rental profits in England, Wales and Northern Ireland will be taxed at 22% (basic), 42% (higher) and 47% (additional), each two points above the equivalent earnings rate. Scotland is carved out of these specific rates for 2027/28 and continues with its own income-tax bands. Crucially, the Section 24 finance-cost reducer rises to 22% in step, so the relief keeps pace at the basic level and no new basic-rate wedge opens between the rate charged and the relief given.
| Band | Rate to 5 April 2027 | Property-income rate from 6 April 2027 | Finance-cost reducer |
|---|---|---|---|
| Basic | 20% | 22% | 20% rising to 22% |
| Higher | 40% | 42% | stays at basic (20%, then 22%) |
| Additional | 45% | 47% | stays at basic (20%, then 22%) |
For Priya, a higher-rate landlord, the practical effect is that her property profit is taxed two points higher while her interest relief stays anchored at the basic rate. The restriction does not get gentler; it gets slightly more expensive. We unpack the planning angle in the 2027 property income tax rates guide and in Section 24 planning for the 2027 tax year.
Section 24 vs a limited company: the route that actually removes the restriction
Section 24 applies to individuals and partnerships, never to companies. A company holding Priya's three properties would deduct the full £35,100 of interest before tax, then pay corporation tax on the smaller profit. That is the heart of the incorporation-versus-Section-24 question, and for a geared higher-rate landlord it is usually the only lever that genuinely neutralises the rules.
| Feature | Personal ownership (Section 24) | Limited company |
|---|---|---|
| Mortgage interest relief | 20% tax credit only (22% from 2027) | Full deduction before tax |
| Rate on profit | 20% / 40% / 45% (22 / 42 / 47 from 2027) | 19% small-profits, 25% main, marginal relief between |
| Profit extraction | Already personal income | Salary or dividend, taxed again on the way out |
| Higher-rate trap | Yes, rents inflate personal income | No, profit stays inside the company |
| Cost to get in | n/a | CGT and SDLT on transfer unless a relief applies |
The catch is the cost of getting there. Transferring property into a company is a disposal for capital gains tax (residential CGT is 18% for basic-rate and 24% for higher-rate taxpayers in 2026/27, with a £3,000 annual exempt amount), and the company pays SDLT on the market value it acquires. Incorporation relief under TCGA 1992 s.162 can defer the CGT where a genuine business is transferred as a going concern, and partnership relief can mitigate the SDLT in the right structures, but neither is automatic. We walk through whether the maths works in the buy-to-let limited company guide and the mechanics in the landlord incorporation step-by-step guide. Incorporation is the right answer for some portfolios and a costly mistake for others; the deciding factor is usually gearing and how long the properties will be held.
Planning options that move Priya's number
Incorporation is the heavyweight option, but it is not the only one, and it is not always proportionate. These are the levers that genuinely change the figure for a £50,000-rent portfolio.
Pension contributions
A personal pension contribution extends Priya's basic-rate band and reduces adjusted net income. If she pays £10,000 gross into a pension, £10,000 more of her property profit is taxed at 20% instead of 40%, clawing back the higher-rate exposure that Section 24 created. This is one of the cleanest ways for an employed landlord to undo the band-stacking, and it has the side benefit of building retirement provision outside the property. For company landlords there is a parallel route through employer contributions, which we cover in employer pension contributions for property company directors.
Splitting ownership with a spouse
If Priya's spouse is a basic-rate taxpayer, shifting beneficial ownership of one or more properties moves rental profit into the lower band. For married couples the default 50:50 split can be overridden to match the real beneficial shares using a Form 17 election. Done properly this can keep more of the portfolio profit inside the basic-rate band, where Section 24 is broadly neutral.
Reducing gearing
Section 24 only hurts to the extent there is interest. Selling the single most highly leveraged property, or using surplus cash to reduce the largest loan, shrinks the non-deductible interest and the grossed-up profit at the same time. This is blunt, and it has its own CGT consequences, but for a landlord who is only just over the higher-rate threshold it can be enough.
Confirming what is genuinely in scope
Not every let is caught. Commercial units, and the commercial element of mixed-use property, still allow full interest deduction. It is worth confirming the status of each property rather than assuming the whole portfolio is residential.
Running the figures yourself
The five-step method below is the same one HMRC's calculation follows, and it is the structure you should keep your records in for Making Tax Digital. If you would rather not do it by hand, our Section 24 calculator applies the same logic, and the larger-portfolio version of this example sits in our £100k rental income case study.
- Work out rental profit before finance costs (rents minus running costs, interest not deducted).
- Stack that profit on top of your other income and deduct the personal allowance.
- Calculate income tax on the total using the normal bands.
- Apply the 20% finance-cost reducer (22% from April 2027), capped at the lowest of finance costs, property profits, and income above the personal allowance.
- Compare the result against the cash you actually keep after real mortgage payments.
For the full mechanics of step four, including how the cap works when profits are low, see how to calculate the Section 24 tax credit step by step.
Section 24 and Making Tax Digital
MTD for Income Tax is no longer a future deadline. 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 6 April 2027 and £20,000 from 6 April 2028. A portfolio generating £50,000 of gross rent is in scope from the first phase, which means the Section 24 calculation now has to be reproduced every quarter from digital records rather than assembled once at year end. The practical implication: get your interest certificates and rent ledger into MTD-compatible software now, because the reducer is only as accurate as the interest figure you feed it. Our MTD for landlords deadline guide sets out what compliance looks like in practice.
Where professional advice earns its keep
The arithmetic on this page is straightforward; the judgement is not. Whether Priya should incorporate, top up a pension, restructure ownership or simply ride it out depends on her gearing, her holding horizon, her spouse's tax position and her wider plans for the portfolio. The interaction between rental profit, employment income, the personal-allowance taper and the 2027 rate change creates trade-offs that a generic calculator cannot resolve. A property specialist can model the routes side by side and tell you which one actually leaves you better off after costs, rather than which one sounds the most aggressive.
If your own numbers look like Priya's, the priority is to know your real band position before the next payment on account falls due, and to decide on a structure before you commit to it under MTD.