Mortgage Interest Restriction (Section 24)

Key facts

Since April 2020, individual landlords cannot deduct mortgage interest from rental income.
Instead, you receive a tax credit equal to 20% of your total finance costs.
Higher-rate (40%) and additional-rate (45%) taxpayers pay significantly more tax under Section 24.
Section 24 applies to individuals only — limited companies can still deduct mortgage interest in full.
Finance costs include mortgage interest, overdraft interest, and fees for arranging or renewing loans.

Overview

Section 24 of the Finance (No. 2) Act 2015 fundamentally changed how individual landlords are taxed on mortgage interest and other finance costs. Before April 2017, landlords could deduct mortgage interest from their rental income, reducing the amount subject to Income Tax. Under Section 24, this deduction has been replaced by a basic-rate (20%) tax credit.^[1]

How Section 24 Works

The calculation now works in two steps:

Calculate your taxable rental profit without any deduction for finance costs (mortgage interest, loan interest, etc.).
Apply a tax credit equal to 20% of your finance costs, which reduces your Income Tax bill.

Worked Example

Item	Before Section 24	Under Section 24
Rental income	£20,000	£20,000
Expenses (excl. mortgage interest)	£5,000	£5,000
Mortgage interest	£8,000	£0 (not deducted)
Taxable rental profit	£7,000	£15,000
Income Tax at 40% (higher-rate)	£2,800	£6,000
Less: 20% tax credit on £8,000	—	−£1,600
Final tax payable	£2,800	£4,400

In this example, the higher-rate landlord pays £1,600 more under Section 24. Basic-rate taxpayers paying 20% tax see no change, because the 20% tax credit exactly replaces the old 20% deduction.^[1]

The “phantom income” problem: Under Section 24, your taxable rental profit is higher than your actual cash profit. This higher profit figure is added to your other income, which can push you into a higher tax band or cause you to lose your Personal Allowance (which is tapered for income above £100,000).

What Counts as Finance Costs?

The following are treated as “finance costs” subject to the restriction:^[2]

Mortgage interest payments
Interest on other loans used to buy or improve the property
Overdraft interest (on a property-related account)
Arrangement fees and renewal fees for mortgages or loans
Alternative finance costs (e.g. Sharia-compliant finance)

Who Is Affected?

Landlord Type	Affected by Section 24?
Individual (basic-rate taxpayer)	No net effect — 20% credit replaces 20% deduction
Individual (higher-rate taxpayer)	Yes — pays more tax
Individual (additional-rate taxpayer)	Yes — pays significantly more tax
Partnership of individuals	Yes — same rules apply to each partner
Limited company	No — can still deduct mortgage interest in full
Furnished Holiday Let (before April 2025)	No — FHL properties were exempt (but FHL regime ended April 2025)

Impact on Tax Bands

Because your taxable rental profit is higher under Section 24, it can have knock-on effects:

A basic-rate taxpayer may be pushed into the higher-rate band
Income above £100,000 causes the Personal Allowance to taper (£1 lost for every £2 above £100,000)
Higher income may affect Child Benefit (the High Income Child Benefit Charge applies above £60,000)
It can increase your student loan repayments threshold assessment

Mitigation Strategies

Landlords affected by Section 24 may consider:

Incorporating: Transferring properties to a limited company so mortgage interest is fully deductible. However, this triggers SDLT and CGT — see our guide to incorporating a property business.
Splitting ownership: If one spouse is a basic-rate taxpayer and the other is higher-rate, shifting ownership may help. See jointly owned property.
Reducing borrowing: Paying down mortgages reduces your finance costs and therefore the impact of Section 24.
Pension contributions: Making pension contributions reduces your taxable income, potentially moving you into a lower band.

Tip: Before making major changes (like incorporation), always seek professional advice. The upfront costs of transferring properties (SDLT at 5% surcharge plus CGT on any gain) can outweigh the annual tax savings from Section 24 mitigation.

Frequently Asked Questions

What is Section 24?

Section 24 of the Finance (No. 2) Act 2015 restricts the tax relief individual landlords can claim on mortgage interest and other finance costs. Instead of deducting these costs from rental income, landlords receive a tax credit equal to 20% of the finance costs. This was phased in from April 2017 and has been fully in effect since April 2020.

Does Section 24 affect landlords who own properties through a company?

No. Section 24 only applies to individual landlords (including partnerships of individuals). Limited companies can still deduct mortgage interest as a business expense before calculating Corporation Tax. This is one reason some landlords have considered incorporating their property businesses.

How does Section 24 affect a higher-rate taxpayer?

A higher-rate taxpayer with £10,000 of mortgage interest would previously have saved £4,000 in tax (40% relief). Under Section 24, they receive only a £2,000 tax credit (20%), an effective increase of £2,000 in tax. The restriction can also push some basic-rate taxpayers into the higher-rate band.

Can Section 24 create a loss?

No. The 20% tax credit cannot create or increase a property loss. However, if your rental profit is less than your finance costs, part of the tax credit may be restricted and carried forward to future years.

Sources

Tax relief for residential landlords: how it’s worked out — GOV.UK
Work out your rental income when you let property — GOV.UK
Finance Act 2015 – Section 24 — legislation.gov.uk