Section 24 tax relief fundamentally changed how UK landlords can claim mortgage interest against their rental income. Introduced in 2017 and fully implemented by 2020, this legislation restricts mortgage interest relief to the basic rate of income tax for individual landlords.

If you're a landlord with mortgage interest on your buy-to-let properties, understanding Section 24 is crucial for managing your tax position and cash flow effectively.

What is Section 24 Tax Relief?

Section 24 tax relief replaces the previous system where landlords could deduct mortgage interest as a business expense from their rental income. Under the old rules, if you were a higher-rate taxpayer, mortgage interest effectively reduced your tax at 40% or 45%.

Now, mortgage interest on residential buy-to-let properties is treated as a tax credit at the basic rate (20%) rather than a deduction. This means regardless of your marginal tax rate, you only get relief at 20%.

The change applies to individual landlords and partnerships, but not to companies. This difference has led many landlords to consider incorporating their property business.

How Section 24 Tax Relief Works

Under section 24 tax relief, the calculation works in two stages:

  • Step 1: Calculate your rental profit without deducting mortgage interest
  • Step 2: Apply a 20% tax credit based on your mortgage interest payments

For example, if you have £30,000 rental income, £8,000 other allowable expenses, and £15,000 mortgage interest:

  • Rental profit before mortgage interest: £22,000 (£30,000 - £8,000)
  • Tax credit available: £3,000 (£15,000 × 20%)
  • If you're a higher-rate taxpayer, you'll pay 40% tax on the full £22,000, then claim back £3,000

Impact on Different Tax Brackets

Basic Rate Taxpayers

If your total income keeps you in the basic rate band, section 24 tax relief has minimal impact. You still effectively get 20% relief on mortgage interest, just through a different mechanism.

Higher Rate Taxpayers

Higher rate taxpayers face the biggest impact. Previously, £10,000 mortgage interest would save £4,000 in tax (40% relief). Now it saves only £2,000 (20% relief), creating an additional £2,000 annual tax liability.

Additional Rate Taxpayers

The impact is even greater for additional rate taxpayers, where mortgage interest previously saved 45% but now saves only 20%.

Expenses Still Fully Deductible

Section 24 tax relief only affects finance costs. Other property expenses remain fully deductible:

  • Repairs and maintenance
  • Insurance premiums
  • Agent fees
  • Ground rent and service charges
  • Legal and professional fees
  • Safety certificates and inspections

These expenses continue to reduce your rental profit pound-for-pound before tax is calculated.

Finance Costs Covered by Section 24

Section 24 tax relief applies to various finance costs beyond mortgage interest:

  • Buy-to-let mortgage interest
  • Loan arrangement fees
  • Interest on loans for property improvements
  • Interest on bridging loans for property purchases

However, it doesn't apply to commercial properties or furnished holiday lets, which maintain full interest deductibility.

Cash Flow Implications

Section 24 tax relief can create significant cash flow challenges. Your tax bill increases while your mortgage payments remain the same, potentially creating a cash shortfall.

A landlord with £100,000 rental income, £60,000 mortgage interest, and other expenses of £20,000 might find their after-tax cash flow significantly reduced compared to the pre-Section 24 position.

This cash flow impact has led many landlords to reassess their financing strategies and consider alternatives like company ownership structures.

Section 24 and Companies

Limited companies remain unaffected by Section 24. Companies can still deduct mortgage interest as a business expense, potentially making incorporation attractive for heavily mortgaged portfolios.

However, incorporation involves other considerations including corporation tax rates, dividend tax, and the complexity of extracting profits. It's not automatically beneficial for every landlord affected by section 24 tax relief.

Planning Around Section 24

Several strategies can help manage the Section 24 impact:

  • Reduce mortgage debt: Lower interest payments reduce the Section 24 impact
  • Increase rents: Higher gross rental yield improves the overall position
  • Review financing structure: Consider whether incorporation makes sense
  • Time disposals carefully: Capital gains can be managed to avoid pushing income into higher tax bands

Record Keeping for Section 24

Accurate record keeping becomes even more important under section 24 tax relief. You need to track:

  • All mortgage interest payments by property
  • Other finance costs eligible for basic rate relief
  • Fully deductible expenses separately
  • Rental income by property

With Making Tax Digital for Income Tax starting in 2026, digital record keeping will become mandatory for landlords with rental income over £10,000.

Getting Professional Help

Section 24 tax relief creates complexity that many landlords struggle with. The interaction between rental profits, personal allowances, and tax credits can be intricate.

Professional advice becomes particularly valuable when considering whether to incorporate, planning disposals, or optimizing your overall tax position. Property tax specialists can model different scenarios and help you understand the long-term implications of various strategies.