How the 20% basic-rate credit works
Before April 2017, UK personal-name residential landlords deducted 100% of mortgage interest as a business expense against rental income. The net profit was taxed at the landlord's marginal income tax rate (20%, 40% or 45%).
From April 2020 (fully phased in from 2017), no mortgage interest is deductible from rental income. Instead, the landlord receives a tax credit equal to 20% of the mortgage interest paid in the year. The credit reduces the tax owed pound-for-pound but is capped at 20% — regardless of whether the landlord is a basic, higher or additional rate taxpayer.
The order of calculation matters:
- Calculate rental income.
- Deduct allowable expenses (excluding mortgage interest) to get taxable rental income.
- Add to other income to find total taxable income.
- Apply income tax bands to total taxable income to find tax owed.
- Subtract the 20% credit on mortgage interest from the tax owed.
Because rental income now appears at gross level (before mortgage costs), it can push total taxable income into a higher tax band — even if the landlord's net cash position is unchanged or worse.
What interest counts for the 20% credit
The 20% credit applies to all finance costs related to UK residential let property held by individuals:
- Mortgage interest (residential BTL mortgages)
- Mortgage arrangement fees and broker fees
- Loan interest on capital used for property purchase or improvement
- Bridging finance interest
- Credit card interest if used for property-related expenses
- Director loan interest if used by a related Ltd to fund property purchases
Note: capital repayments are not interest and don't count. Only the interest portion of mortgage payments. For interest-only mortgages, the full monthly payment is interest. For repayment mortgages, the interest portion declines over time as principal is paid down.
If you have a mixed-use mortgage or borrowed against your residential home to fund a BTL deposit, only the interest on the property-related portion counts.
Calculation examples at different income levels
Basic-rate taxpayer landlord
£40,000 salary, single BTL with £18,000 rent and £8,000 mortgage interest.
- Rental income: £18,000
- Less other expenses: £2,500
- "Taxable" rental income: £15,500
- Plus salary: £40,000
- Total taxable income: £55,500
- Less personal allowance: £12,570
- Taxable: £42,930
- Tax: £37,700 × 20% + £5,230 × 40% = £7,540 + £2,092 = £9,632
- Less 20% credit on £8,000 interest: £1,600
- Net tax owed: £8,032
Note: the landlord crossed into higher-rate band purely because rental income is now reported gross. Before Section 24, they'd have been in basic rate. They lose 40% on the slice above £50,270.
Higher-rate taxpayer landlord
£80,000 salary, single BTL with £20,000 rent and £12,000 mortgage interest.
- Rental income: £20,000
- Less other expenses: £2,000
- "Taxable" rental income: £18,000
- Plus salary: £80,000
- Total taxable income: £98,000
- Less PA: £12,570
- Tax: £37,700 × 20% + £47,730 × 40% = £7,540 + £19,092 = £26,632
- Less 20% credit on £12,000 interest: £2,400
- Net tax owed: £24,232
The 20% credit recovers £2,400 of the otherwise-£4,800 of relief they'd have got at higher rate. Net cost vs pre-Section 24: £2,400/year.
Why your tax band can move under the new rule
The most insidious effect of Section 24 is the way it pushes landlords into higher tax bands. Because rental income is reported gross (before mortgage costs), it counts toward income-tax thresholds in a way it didn't before.
Worked illustration: a basic-rate-taxpayer landlord with £45,000 salary and a £15,000-rent BTL with £10,000 mortgage interest.
Pre-Section 24
- Salary: £45,000
- Taxable rental (after mortgage interest): £15k − £10k − £1.5k other expenses = £3,500
- Total income: £48,500 (still in basic-rate band, threshold £50,270)
- Tax on rental: £3,500 × 20% = £700
Post-Section 24
- Salary: £45,000
- "Taxable" rental (after non-interest expenses): £15k − £1.5k = £13,500
- Total income: £58,500 (crossed into higher-rate band)
- Of which £8,230 is in the higher-rate band, taxed at 40%
- Tax on rental portion: ~£3,150 (basic) + £8,230 × 40% on the slice above £50,270 — total approximately £3,250 specifically attributable to the rental
- Less 20% credit on £10,000 interest: £2,000
- Net tax on rental: ~£1,250
The same landlord's tax band shifted from basic to higher, and their tax bill on the rental went up by £550 — even though their net cash position is unchanged.
For landlords near tax-band thresholds, the band-shift effect can be material. Bringing a partner onto the ownership (50/50) can put each individual back in a lower band, mitigating this.
The Ltd company alternative — mortgage interest fully deductible
Property held in a UK Ltd company SPV is outside the Section 24 regime entirely. Mortgage interest remains a fully deductible business expense against rental income. For higher-rate-taxpayer landlords, this restores the pre-2017 economics.
See BTL via Limited Company Tax for the full comparison and SPV mortgages on Limited Company Mortgage for the financing side. The structural decision is the single biggest tax planning move available to UK landlords post-Section 24.
Planning moves to reduce Section 24 impact (personal-name)
For landlords who don't want to incorporate, several moves reduce Section 24's impact:
- Pay down the mortgage. Less interest means less of the restriction. Use accumulated cash to reduce principal — particularly useful for landlords who are mortgage-overweight by historical accident (bought at low LTV, mortgage has rolled over).
- Bring a spouse onto the ownership. Joint ownership splits the rental income between two personal allowances and two basic-rate bands. Effective when one spouse is in a lower tax band than the other. CGT-free transfer between spouses.
- Increase rents. The simplest response — if the market supports it. Section 24 increased the effective tax rate; charging more covers some of the difference.
- Reduce non-interest expenses. Counter-intuitive but: every £ of "other" expense reduces taxable rental income at your marginal rate (40-45%), while every £ of mortgage interest only gives you 20% relief. Within reason, prioritising tax-efficient expense management makes a difference.
- Make pension contributions. Personal pension contributions reduce your "adjusted net income" — useful if you're being pushed into the £100k+ personal allowance taper or the additional-rate band.
- Sell highly-geared properties first. If you're going to reduce portfolio size for any reason, prioritise the most highly-leveraged BTLs where Section 24 hits hardest.