Section 24 Mortgage Interest Restriction Explained
If you own rental property in your own name and have a mortgage, you are almost certainly affected by Section 24. The restriction changed how mortgage interest is treated for tax purposes — and for higher-rate taxpayers, the effect is severe.
A landlord with £30,000 in rent and £15,000 in mortgage interest has an economic profit of £15,000. Before Section 24, they paid £6,000 in tax. Today, they pay £9,000. That is an effective tax rate of 60% on their actual profit — and from April 2027, it rises to 62%.
This article explains the mechanism, shows you the numbers, and sets out your options.
Key takeaways for landlords
Section 24 replaced full mortgage interest deduction with a basic-rate tax credit — fully phased in since April 2020 (Finance Act 2015)
Basic-rate taxpayers: minimal net impact — the credit rate matches the tax rate. Higher-rate taxpayers face a permanent 20 percentage-point gap between tax charged and credit received
On £30,000 rent with £15,000 mortgage interest, a higher-rate taxpayer pays £9,000 in tax — an effective 60% rate on economic profit (2025–26)
Budget 2025 increases property income tax rates from April 2027 (+2pp at all bands) but also raises the credit rate to 22% — the structural gap for higher-rate taxpayers is unchanged
Limited companies are exempt from Section 24 — but incorporation has its own costs, constraints, and tax consequences
What Is Section 24?
Section 24 of the Finance (No.2) Act 2015 changed how individual landlords claim tax relief on mortgage interest and other finance costs for residential property.
Before Section 24, landlords deducted mortgage interest from rental income before calculating tax — just like any other business expense. Section 24 removed that deduction entirely and replaced it with a tax credit at the basic rate of income tax.
The restriction applies to:
- Individual landlords (including partnerships of individuals and trustees)
- Residential property finance costs only
It does not apply to:
- Limited companies — which continue to deduct finance costs as a business expense before corporation tax
- Commercial property — which remains outside the scope of the restriction
The change was phased in over four tax years:
| Tax year | Deductible | Credit |
|---|---|---|
| 2016–17 (pre-S24) | 100% | 0% |
| 2017–18 | 75% | 25% |
| 2018–19 | 50% | 50% |
| 2019–20 | 25% | 75% |
| 2020–21 onwards | 0% | 100% |
Since April 2020, none of your mortgage interest is deductible. All relief comes through the credit.
How the Restriction Works
Old rules vs new rules
Under the pre-2017 rules, if you earned £30,000 in rent and paid £15,000 in mortgage interest, HMRC taxed you on £15,000 — the net amount after deducting interest.
Under Section 24, HMRC taxes you on the full £30,000. You then receive a tax credit equal to your finance costs multiplied by the basic rate of income tax (20% for 2025–26; 22% from April 2027).
The basic-rate tax credit
The credit is calculated as:
Eligible finance costs × basic rate of income tax
"Finance costs" includes mortgage interest, interest on loans used to buy furnishings, and fees for taking out or repaying mortgages (HMRC PIM2052).
The credit is capped at the lowest of:
- The credit amount itself
- Your property profit
- Your total income tax liability
For a basic-rate taxpayer, the credit at 20% offsets the tax at 20% — the net effect is near zero. For a higher-rate taxpayer at 40%, the credit covers only half the tax on the interest portion. That gap is the real cost of Section 24.
The credit is a tax reduction, not a deduction. It reduces your tax bill after it has been calculated — it does not reduce your taxable income.
Worked Example: The Real Cost
Consider a landlord earning £30,000 in gross rent with £15,000 in annual mortgage interest. They are a higher-rate taxpayer — their other income has already used their personal allowance and basic-rate band.
| Before S24 (pre-2017) | After S24 (2025–26) | After S24 (2027–28) | |
|---|---|---|---|
| Gross rental income | £30,000 | £30,000 | £30,000 |
| Mortgage interest | £15,000 | £15,000 | £15,000 |
| Taxable income | £15,000 | £30,000 | £30,000 |
| Tax at marginal rate | £6,000 (40%) | £12,000 (40%) | £12,600 (42%) |
| S24 tax credit | — | −£3,000 (20%) | −£3,300 (22%) |
| Tax payable | £6,000 | £9,000 | £9,300 |
| Economic profit | £15,000 | £15,000 | £15,000 |
| Effective rate on economic profit | 40% | 60% | 62% |
Assumes other income has consumed the personal allowance (£12,570) and basic-rate band. Finance cost relief rate: 20% (2025–26), 22% (2027–28) per HMRC Technical Note, Budget 2025.
The tax payable has increased by 50% — from £6,000 to £9,000 — despite no change in the landlord's economic position. The economic profit remains £15,000 in every column. Only the tax treatment has changed.
From April 2027, Budget 2025 increases all property income tax rates by 2 percentage points (basic: 22%, higher: 42%, additional: 47%). The credit rate also rises to 22%, so the percentage-point gap for higher-rate taxpayers remains 20pp — but the absolute cost increases modestly, from £9,000 to £9,300 in this example. See the Budget 2025 hub for full details on the rate changes.
Who Is Most Affected?
The severity of Section 24 depends on two variables: your marginal tax rate and your mortgage interest as a proportion of rent.
- Basic-rate taxpayers (20%): Minimal impact. The credit rate matches the tax rate, so the net S24 cost is near zero.
- Higher-rate taxpayers (40%): Significant. The 20pp gap between tax and credit creates a structural penalty on every pound of mortgage interest.
- Additional-rate taxpayers (45%): Severe. The gap widens to 25pp.
The second variable is leverage. A landlord with £5,000 of mortgage interest on £30,000 of rent has a modest S24 cost. A landlord with £20,000 of interest on the same rent has a large one. The combination of high tax rate and high leverage produces the maximum Section 24 impact.
At extreme leverage, Section 24 can produce a tax bill that exceeds the landlord's cash profit after mortgage payments. This is the scenario driving the sharp increase in limited company ownership: 345,426 active buy-to-let companies at the start of 2024, 68% formed between 2017 and 2023 (Hamptons/Companies House data).
What Are Your Options?
Section 24 is permanent legislation with no sunset clause. The options available are structural, not temporary:
1. Absorb the cost. If you are a basic-rate taxpayer or have low leverage, the S24 cost may be small enough to accept. This requires no action and no transaction costs.
2. Reduce leverage. Paying down your mortgage reduces the non-deductible finance cost. This is effective but ties up capital that could earn returns elsewhere.
3. Incorporate. Transferring property to a limited company restores full finance cost deductibility under corporation tax rules — but triggers SDLT on the transfer, potential CGT, and ongoing administration costs. This is a structural decision, not a quick fix. Read our analysis of limited companies for UK property investment before making this decision.
4. Quantify your position. Model your actual tax impact before deciding. PropMatch's rental yield calculator models Section 24 automatically — enter your figures to see your pre- and post-tax yield. To understand how this calculation fits into your overall returns, see our detailed guide to rental yield tax calculations. Use the Budget 2025 Impact Calculator for the 2027–28 rate changes, or compare your tax across years.
Frequently Asked Questions
Can I still deduct mortgage interest from my rental income?
No. Since April 2020, individual landlords cannot deduct residential mortgage interest from rental income. Instead, you receive a basic-rate tax credit — currently at 20% (rising to 22% from April 2027 per Budget 2025). You are taxed on your full rental income, then the credit reduces your tax bill. For basic-rate taxpayers the net effect is minimal; for higher-rate taxpayers the credit covers only part of the tax charged.
Does Section 24 apply to limited companies?
No. Limited companies deduct finance costs as a business expense before calculating corporation tax. This structural exemption is one reason many landlords consider incorporation — but transferring property into a company triggers SDLT, potential CGT, and ongoing administration costs. See our analysis of limited companies for property investment for the full decision framework.
Does Section 24 affect basic-rate taxpayers?
Minimally. The tax credit is given at the basic rate, so it offsets most or all of the tax charged on the mortgage interest portion. The restriction primarily affects higher-rate (40%) and additional-rate (45%) taxpayers, where the gap between the rate of tax and the rate of credit creates a structural cost.
How does Budget 2025 change Section 24?
From April 2027, property income tax rates increase by 2 percentage points at all bands (22%, 42%, 47%). The S24 credit rate also rises to 22%, per the HMRC Technical Note. The percentage-point gap for higher-rate taxpayers is unchanged (20pp), but the absolute tax cost increases modestly.
What is a Section 24 tax credit?
A tax reduction equal to your eligible finance costs multiplied by the basic rate of income tax (20% for 2025–26; 22% from 2027–28). It reduces your tax bill after it has been calculated — it is not a deduction from taxable income. The credit is capped at the lower of the credit amount, your property profit, and your total income tax liability.
Related PropMatch Analysis
These analyses address decisions that interact directly with Section 24.
- Limited Companies for UK Property Investment: What Actually Matters — Adjacent decision path. How company ownership changes the tax treatment of rental income, and the real costs and constraints of incorporating a property portfolio.
- Rental Yield Tax Calculations — Prerequisite context. How rental yield is calculated after tax, including the Section 24 mortgage interest credit mechanism.
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