Section 24 Landlord Tax: The Maths That Shows What You're Really Paying (2026/27)

Author: TJ Smith

Most landlords I speak to know that Section 24 is bad. Fewer of them have actually run the numbers to see exactly how bad it is for their specific portfolio.

The anger tends to arrive when they see their self assessment bill for the first time after the rule was fully implemented. Properties that looked profitable when they bought them now generate a tax bill even when the cash flow is barely positive, or in some cases negative.

This article runs the full Section 24 landlord tax calculation with real figures so you can see precisely what is happening to your money, why it happens, and what the planning options actually look like.

What Section 24 changed

Before 2017, individual landlords could deduct mortgage interest (and other finance costs) directly from their rental income, reducing the taxable profit. A property generating £15,000 a year in rent with £9,000 in mortgage interest had a taxable profit of £6,000.

From 2020/21 onwards, that deduction was removed entirely. Instead, you now get a tax credit equal to 20% of the mortgage interest. Not a deduction from profit. A credit against the final tax bill.

The mechanism sounds minor until you see the numbers.

Why this hits higher-rate taxpayers so hard

Here is a simple comparison to show the before and after.

Rental property in 2016 (old rules): - Annual rent: £15,000 - Mortgage interest: £9,000 - Other allowable expenses (insurance, agent fees, maintenance): £2,100 - Taxable profit: £15,000 minus £9,000 minus £2,100 = £3,900 - Tax at 40% (higher-rate taxpayer): £1,560

The same property in 2026/27 (Section 24): - Annual rent: £15,000 - Other allowable expenses (no mortgage interest): £2,100 - Taxable profit: £15,000 minus £2,100 = £12,900 - Tax at 40% on £12,900: £5,160 - Less 20% credit on mortgage interest: 20% x £9,000 = £1,800 - Tax owed: £3,360

The property generates the same cash. The landlord has the same cash outgoings. The tax bill went from £1,560 to £3,360. An increase of £1,800 per year. On a single property.

Multiply that across a portfolio of five properties and you are looking at an additional £9,000 a year in tax on the same income.

Worked example 1: the cash-flow negative landlord who still owes tax

This is the scenario that generates the most outrage, because it seems genuinely absurd.

Property details: - Monthly rent: £1,400 (£16,800 per year) - Monthly mortgage payment: £1,250 (£15,000 per year, interest portion £13,200, capital repayment £1,800) - Other expenses (insurance, agent at 10%, minor repairs): £2,400 per year - Net cash flow after mortgage and expenses: £16,800 minus £15,000 minus £2,400 = minus £600 per year

This landlord is losing £600 a year in cash terms. They are subsidising a tenant's housing out of their own income.

The tax calculation under Section 24: - Rental income: £16,800 - Allowable expenses (no mortgage interest): £2,400 - Taxable rental profit: £14,400 - This is added to their employment income of £65,000, making total income £79,400 - All rental profit is in the higher rate band at 40%: 40% x £14,400 = £5,760 - Less 20% credit on mortgage interest: 20% x £13,200 = £2,640 - Tax owed on this property: £3,120

A landlord losing £600 a year in cash owes £3,120 in income tax on that property.

The actual net position: minus £600 cash flow minus £3,120 tax = minus £3,720 per year. The property is costing them £310 a month.

This is not a theoretical scenario. This is what high loan-to-value buy-to-let looks like for a higher-rate taxpayer in 2026/27.

Worked example 2: a landlord with a moderately leveraged portfolio

Three properties, each: - Monthly rent: £1,200 (£14,400 per year, £43,200 total) - Monthly mortgage interest: £500 (£6,000 per year, £18,000 total) - Other annual expenses per property: £1,800 (£5,400 total)

Total rental calculation: - Total rent: £43,200 - Other expenses: £5,400 - Taxable rental profit: £37,800

Owner's personal position: employed on £55,000 salary. Total income including rental profit: £92,800. Rental profit taxed in the higher rate band.

Tax on rental income: - 40% x £37,800 = £15,120 - Less 20% credit on £18,000 mortgage interest = £3,600 - Tax on rental: £11,520

Effective tax rate on the rent actually received: £11,520 divided by £43,200 = 26.7%. But measured against actual net cash received (£43,200 minus £18,000 interest minus £5,400 expenses = £19,800 cash profit), the tax of £11,520 represents 58.2% of cash flow.

Before Section 24, the tax would have been: 40% x (£43,200 minus £18,000 minus £5,400) = 40% x £19,800 = £7,920. The same portfolio now costs an additional £3,600 in tax, every year. That is the Section 24 impact in clean numbers.

What Section 24 does to marginal decisions

The effect is not just on the existing tax bill. It changes the economics of every portfolio decision.

If this landlord's portfolio generates income that pushes their total adjusted net income above £100,000, they also start losing their personal allowance, creating an effective 60% marginal rate on income in the £100,000 to £125,140 band. Rental income contributing to that band is extraordinarily expensive to have.

It also changes the refinancing equation. Raising the loan-to-value ratio to release equity, which used to be largely tax-neutral in terms of the income calculation, now increases the taxable profit because the higher mortgage interest still does not reduce the profit figure.

What you can actually do about it

There is no clean solution to Section 24. The options each come with trade-offs.

Pension contributions

Making pension contributions reduces your adjusted net income. If rental income is pushing you into the higher rate band, or close to the £100,000 threshold, pension contributions can bring adjusted net income down, meaning more of your rental profit is taxed at 20% rather than 40%. The 20% tax credit on mortgage interest then represents the full tax relief rather than just half of it.

This is not a portfolio restructuring. It is a personal tax reduction that works alongside the existing structure.

Incorporation (selling to a limited company)

A limited company is not subject to Section 24. Mortgage interest remains fully deductible for company landlords. For a highly leveraged portfolio, the annual Corporation Tax saving versus the Section 24 position can be substantial.

The problem: moving properties into a company is a disposal for Capital Gains Tax purposes (unless you meet the conditions for incorporation relief, which most landlords with investment properties rather than trading activity do not). Stamp Duty Land Tax also applies on the deemed transfer at market value where there is a mortgage.

For a portfolio where properties have appreciated significantly, the upfront tax cost of incorporation can run into six figures. The breakeven on the annual saving can be 15 to 20 years.

For landlords buying new properties, acquiring through a company from the outset sidesteps this problem entirely.

Reducing leverage

Paying down mortgage debt reduces the interest charge and therefore the size of the Section 24 problem. This is not tax planning in the traditional sense, it is structuring the portfolio to carry less debt. But if rental income is generating an effective tax rate of 58% on cash flow, the after-tax return on deploying additional capital to reduce mortgage debt can compare favourably with almost any other use of that money.

Transferring to a lower-rate taxpayer

If your spouse pays tax at the basic rate or lower, transferring properties (or beneficial ownership) to them means the rental profit is taxed at their marginal rate. The mortgage interest credit of 20% then matches their tax rate, and the Section 24 distortion largely disappears.

Transfers between spouses carry no Capital Gains Tax trigger (on a no-gain no-loss basis). SDLT does apply where there is a mortgage being assumed, at normal SDLT rates including the 3% additional dwellings surcharge. And the transfer must reflect genuine ownership.

Restructuring the portfolio

Some properties in a highly leveraged portfolio will never generate a positive after-tax cash return under Section 24. If the capital appreciation is not compelling enough to justify the negative carry, selling the highest-LTV properties and redeploying capital into lower-geared alternatives can make economic sense.

This is a portfolio-level decision, not a tax decision. But tax should be part of the modelling.

Getting the planning right

If you have a buy-to-let portfolio with mortgage finance and your income is in the higher rate band, the Section 24 impact is real and material. The question is not whether to do something about it, it is which of the available options makes sense for your specific numbers.

Our property portfolio tax planning service starts by modelling the actual Section 24 position on your portfolio, then working through which options generate the best after-tax outcome given your specific property values, mortgage positions, other income, and long-term plan. Prices from £1,500 depending on portfolio size.

Or get a quote for ongoing accountancy support.

Frequently asked questions

What is Section 24 and when did it come in? Section 24 of the Finance (No. 2) Act 2015 phased out the ability for individual landlords to deduct mortgage interest as an expense from rental income. It was fully implemented from the 2020/21 tax year. Now, instead of deducting mortgage interest before calculating taxable profit, landlords add back the interest and receive a 20% tax credit on it. For higher-rate taxpayers this is significantly worse.

How do I calculate my Section 24 tax liability? Step 1: Calculate rental profit ignoring mortgage interest (rent minus allowable expenses other than interest). Step 2: Add this to your other income to determine your tax rate. Step 3: Calculate income tax on the full rental profit. Step 4: Deduct a 20% credit on the mortgage interest (not the full interest, just 20% of it). The result is your tax liability. For many higher-rate landlords, the liability exists even when the property is cash-flow negative.

Can I still deduct any mortgage costs as a landlord? No mortgage interest deduction is available for individual landlords. The only relief is the 20% tax credit. You can still deduct other property expenses: letting agent fees, repairs and maintenance, insurance, ground rent, service charges, professional fees, and replacement of domestic items. Capital improvements are not deductible but may reduce a future Capital Gains Tax bill.

Does Section 24 apply to limited companies? No. Section 24 only applies to individual landlords and partnerships. A limited company can still deduct mortgage interest as a business expense in the normal way. This is a central reason why many landlords with growing portfolios consider incorporating, though incorporation has significant costs of its own including Stamp Duty Land Tax and potentially Capital Gains Tax on transfer.

Does Section 24 apply to commercial property? No. Section 24 applies only to residential buy-to-let properties. Commercial property remains on the old rules where finance costs are deductible as a business expense.

My property is barely cash-flow positive after mortgage payments. Can I really owe tax? Yes. This is the most counterintuitive result of Section 24. A landlord can have a property generating £200 per month in cash flow after paying the mortgage, but owe income tax of £4,800 a year on that property if they are a higher-rate taxpayer. The tax calculation ignores the mortgage payment and taxes the gross profit.

What are my options to reduce Section 24 impact? The main options are: increasing rent to improve the gross yield; making pension contributions to reduce adjusted net income and your effective tax rate; incorporating the portfolio (complex, expensive, but removes Section 24 entirely for future profits); selling higher-leveraged properties and reducing mortgage debt on remaining ones; or restructuring ownership to a lower-rate taxpayer (spouse transfer, though SDLT and CGT apply). None of these is simple. Each has costs and trade-offs.

Can I transfer properties to my spouse to avoid Section 24? Transfers between spouses are at no-gain no-loss for Capital Gains Tax purposes, so CGT is not triggered. However, SDLT does apply if there is a mortgage being assumed. The transfer is genuine only if the spouse genuinely owns the property from that point and income is split accordingly. HMRC will look at beneficial ownership arrangements. If your spouse is a lower or basic-rate taxpayer, the saving can be real, but the transfer needs to be properly documented and commercially genuine.