Section 24 Explained: Impact on Your Tax Bill with Worked Examples

Section 24 means you pay tax on rental income before deducting mortgage interest, then get only a 20% credit on that interest, regardless of whether you are basic, higher, or additional rate.

"This guide provides general information about UK landlord tax obligations. It is not financial or legal advice. Tax treatment depends on your individual circumstances and may change. Consider consulting a qualified accountant or solicitor for advice specific to your situation."

1. What Section 24 actually is and who it hits

Legal hook:

Section 24 of the Finance (No. 2) Act 2015 inserted new rules into ITTOIA 2005 that restrict "dwelling-related loan" interest for individual landlords.

From 2020-21 onwards, no interest deduction is allowed in calculating rental profits for income tax. Instead you calculate tax on profits before finance costs, then deduct a 20% basic-rate credit on those finance costs.

Who is affected:

• Individuals (and partners in partnerships) with residential property finance costs.
• UK or overseas residential property businesses, unless they qualify as Furnished Holiday Lets (FHL), which are treated differently.

Not affected:

• Companies -- Corporation Tax rules still allow full deduction of mortgage interest as an expense.
• Commercial property where Section 24 does not apply.

History:

Phased in over 4 years from April 2017:

• 2017-18: 25% of interest restricted.
• 2018-19: 50%.
• 2019-20: 75%.
• From 2020-21: 100% restricted, with full 20% credit instead.

The upshot: all individual landlords with residential finance costs are taxed on higher "paper profits" than their real cash position.

2. The "phantom profit" explained with numbers

Use a simple, realistic BTL:

• Rent: GBP 1,000/month = GBP 12,000/year.
• Mortgage interest: GBP 600/month = GBP 7,200/year (interest-only, mid-LTV, 2025-26 rate).
• Other allowable costs (repairs, insurance, etc.): ignore for now to isolate Section 24.

Before Section 24 (old rules)

Taxable profit = rent - interest.

• Rent: GBP 12,000
• Less interest: GBP 7,200
• Profit: GBP 4,800

Tax:

• Basic rate (20%): GBP 960
• Higher rate (40%): GBP 1,920
• Additional (45%): GBP 2,160

After Section 24 (current rules)

Step 1: calculate taxable profit without interest:

• Taxable profit = GBP 12,000

Step 2: work out tax on that profit at your marginal rate:

• Basic: 20% of 12,000 = GBP 2,400
• Higher: 40% of 12,000 = GBP 4,800
• Additional: 45% of 12,000 = GBP 5,400

Step 3: apply the 20% credit on finance costs:

• 20% of GBP 7,200 = GBP 1,440 credit.

Final tax:

• Basic-rate: 2,400 - 1,440 = GBP 960
• Higher-rate: 4,800 - 1,440 = GBP 3,360
• Additional-rate: 5,400 - 1,440 = GBP 3,960

Compare to the old world

Same rent, same mortgage, very different tax. That extra GBP 1,440-1,800 per property per year is the "phantom profit" -- money you never saw, but are taxed on.

3. How this pushes you into higher tax and hits CB and personal allowance

Because you now calculate taxable income before mortgage interest, Section 24 can push:

• Your total income into higher tax bands.
• You over thresholds for Child Benefit High Income Charge (HICBC) and personal allowance taper.

Band creep

Suppose:

• Salary: GBP 48,000.
• Old pre-Section-24 rental profit: GBP 4,800 (after interest).
• Total taxable income: GBP 52,800 -- some at higher rate already, but Section 24 makes it worse.

After Section 24:

• Rental "profit" for band tests: GBP 12,000 (before interest).
• Total income used for banding: GBP 60,000.

Two hits:

• More of your income is taxed at 40% instead of 20% (because your taxable income is artificially higher).
• You now cross GBP 60,000, triggering full Child Benefit High Income Charge if you or your partner receive Child Benefit.

Child Benefit High Income Charge

• HICBC claws back Child Benefit between GBP 50,000-60,000 adjusted net income.
• Under Section 24, your "adjusted net income" calculation uses property profits before interest, then adds back a 20% credit, which can push you into the HICBC band or up to full clawback.

Example:

• Without Section 24, your adjusted net income might have been GBP 52,800.
• With Section 24, same real cash but adjusted net income counted as GBP 60,000, wiping out Child Benefit.

Personal allowance taper (GBP 100k-125,140)

If your salary is near GBP 100,000, Section 24 can be brutal.

• The personal allowance tapers away between GBP 100,000 and GBP 125,140, giving an effective marginal tax rate of 60% in that band.
• Extra "paper income" from rent before interest under Section 24 can push more of your income into this taper.

Example:

• Salary: GBP 95,000.
• Rental taxable profit under Section 24: GBP 12,000 (before interest).
• Adjusted net income: GBP 107,000.
• You are now GBP 7,000 into the taper. You lose GBP 3,500 of personal allowance.
• At 40% tax, that lost allowance alone costs you GBP 1,400, even before the extra Section 24 tax on the rent itself.
• Without Section 24, your rental taxable profit would have been GBP 4,800, putting total income at GBP 99,800, just below the taper start, so you would keep the full allowance.

4. LTV levels: why leverage matters so much now

Section 24 hurts more the higher your interest vs rent (ie high LTV and higher rates).

Assume:

• Property value: GBP 200,000.
• Rent: GBP 1,000/month = GBP 12,000/year.
• Ignore other expenses for clarity.

50% LTV (low gearing)

• Mortgage: GBP 100,000.
• Interest at 5.4%: approx GBP 5,400/year.

65% LTV

• Mortgage: GBP 130,000.
• Interest at 5.4%: approx GBP 7,020/year.

75% LTV (common BTL)

• Mortgage: GBP 150,000.
• Interest at 5.4%: approx GBP 8,100/year.

Pattern:

• Basic rate: if you stay basic, Section 24 broadly leaves your effective rate on true profit about the same, regardless of LTV.
• Higher/additional: the more interest, the more your tax bill climbs under Section 24 compared to the old world. High-LTV, interest-heavy deals are now punished hardest.

That is why you see portfolio landlords aggressively paying down mortgages or shifting new acquisitions into companies, especially at 65-75% LTV.

5. Why companies are not hit (and the trade-offs)

Companies are taxed under Corporation Tax rules, not the Section 24 rules for individuals.

• Companies still calculate rental profits after deducting all finance costs, as usual trading or property business expenses.
• There is no 20% credit restriction. Interest just reduces profit before Corporation Tax.

So:

• At, say, 25% Corporation Tax, every GBP 1 of interest saves 25p in tax, regardless of your personal band.
• For a higher-rate individual, Section 24 effectively gives 20% relief, not 40%, and pushes you into band creep.

The trade-offs:

You avoid Section 24 on new purchases in a company, but you pay:

• Higher mortgage rates and fees on SPV BTL.
• Corporation Tax on profits, and further tax when you extract cash (dividends, salary).
• Extra admin and accountancy costs.

The numbers you ran in guide 1.2 are exactly what accountants are doing: modelling total tax over the holding period vs incorporation costs, not just looking at one year.

6. Common Section 24 misunderstandings and forum myths

Misunderstandings:

"Basic-rate landlords are unaffected." Only true if you stay basic-rate on total income. Section 24 can push you into higher rate or trigger HICBC, at which point you are affected.

"Interest is still deductible, you just get less relief." No: ITTOIA as amended by s24 explicitly disallows interest in computing rental profits from 2020-21 onwards for individuals. Relief is via a separate tax credit, which behaves differently for banding and thresholds.

"Companies got a special landlord tax break." No: they simply stayed on the existing Corporation Tax rules that always allowed interest as an expense. Individuals' rules were changed instead.

What Property118, Reddit and forums often get wrong:

"Incorporate everything and Section 24 goes away." Reality: Incorporation triggers CGT and SDLT/ADS on full current values unless you meet strict incorporation relief / partnership tests that HMRC is now actively challenging. Many marketed schemes (often discussed on Property118) stretch those tests. HMRC Spotlights have directly targeted landlord incorporation schemes. You can end up spending GBP tens of thousands on taxes and fees to save GBP a few thousand per year, with a breakeven measured in decades.

"Section 24 only matters if you are highly geared." Reality: any higher-rate landlord with finance costs feels it. High LTV amplifies it, but even 50% LTV portfolios can see significant extra tax and band creep.

"HMRC will roll it back if enough landlords complain." Reality: this has been fully in force since 2020-21 and is baked into long-term policy, with official documents repeatedly reaffirming its purpose and effect.

The only honest way to approach Section 24 now is:

• Assume it is permanent.
• Model your portfolio at realistic rates and LTVs.
• Decide whether to:
• De-leverage personal property,
• Shift new purchases into companies,
• Or exit marginal deals where Section 24 + rates have killed the economics.

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