Section 24 is the reason a lot of landlords saw their tax bill jump without their rent changing. It stops individual landlords deducting mortgage interest as an expense and gives a flat 20% credit instead. For basic-rate taxpayers that is broadly neutral; for higher-rate taxpayers it is expensive, and it can quietly push people into a higher band they were never really in. This guide explains the mechanism, who it hits hardest, and the "phantom profit" problem at the centre of it.
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What Section 24 actually changed
Section 24 of the Finance (No. 2) Act 2015 changed how mortgage interest is treated for individual landlords of residential property. It was announced by George Osborne in 2015, phased in from April 2017, and has been fully in force since April 2020.
Before Section 24, you deducted mortgage interest from your rental income like any other business expense, then paid tax on what was left. After Section 24, you cannot deduct it at all. Instead, HMRC works out your tax on your rental profit before mortgage interest, then gives you back a tax credit worth 20% of your finance costs. The relief is now a flat 20% credit regardless of your tax band, where it used to be relief at your own marginal rate.
That one structural change, from deduction to credit, is the whole story. Everything else follows from it.
How the calculation works
It is easiest to see with numbers. Take a landlord with £20,000 of rental income and £12,000 of mortgage interest, and ignore other costs for simplicity.
Before Section 24: taxable profit was £20,000 minus £12,000 = £8,000. A higher-rate taxpayer paid 40% of £8,000 = £3,200.
After Section 24: taxable profit is the full £20,000 (interest ignored at this stage). A higher-rate taxpayer pays 40% of £20,000 = £8,000, then gets a 20% credit on the £12,000 interest = £2,400 back. Net tax: £8,000 minus £2,400 = £5,600.
Same property, same rent, same mortgage. The tax bill went from £3,200 to £5,600. The gap exists because the landlord is taxed at 40% on income that used to be sheltered, but only gets 20% of it back.
Who it actually affects
The impact depends entirely on your tax band:
- Basic-rate taxpayers (20%): broadly neutral. The old deduction gave 20% relief, the new credit gives 20% relief, so the two roughly cancel out, unless the change tips you over a threshold (see below).
- Higher-rate (40%) and additional-rate (45%) taxpayers: materially worse off. They are taxed at their full rate on the grossed-up profit and only get 20% back. The more you borrow relative to your rent, the bigger the hit.
Heavily mortgaged higher-rate landlords feel it most. In a high-interest period it is possible for the tax bill to exceed the actual cash profit, so the property loses money after tax while still looking profitable on paper.
The phantom profit problem
This is the part that catches people who think they are basic-rate taxpayers. Because mortgage interest is no longer deducted before working out your profit, your taxable rental profit is higher than your real profit. HMRC sees a bigger number than you actually earned in cash.
That inflated figure has knock-on effects beyond the rental tax itself:
- It can push you into the higher-rate band. A landlord who is genuinely a basic-rate taxpayer on real profit can show enough taxable income to cross the £50,270 higher-rate threshold, and pay 40% on income they never really received in cash.
- It can taper your personal allowance. Once total income passes £100,000, the personal allowance is withdrawn at £1 for every £2 above, creating an effective 60% marginal rate between £100,000 and £125,140. Section 24 can push you into that zone.
- It can affect income-tested things like child benefit and certain allowances, because they look at the grossed-up figure.
This is why it is nicknamed the "tenant tax": the inflated profit is an artefact of the tax rule, not real money, but it is taxed as though it were.
Who is exempt
Section 24 applies to individual landlords of residential property, including those letting jointly in their own names. Two main groups sit outside it:
- Limited companies. A company still deducts mortgage interest in full as a business expense and pays corporation tax on the profit after interest. This is the single biggest reason landlords have incorporated since 2017. Incorporating an existing portfolio is not free, though: it can trigger stamp duty and capital gains tax on the transfer, so it needs a proper break-even analysis, and for a single property the costs often outweigh the benefit.
- Commercial property. Section 24 is specific to residential lettings.
One recent change worth flagging: furnished holiday lets used to be exempt, but the FHL regime was abolished on 6 April 2025, so holiday lets are now inside the Section 24 net like any other residential let.
How this connects to MTD
Section 24 matters even more now that Making Tax Digital is live, because the mechanics interact. Under MTD you report rental income and expenses quarterly, and mortgage interest is treated as a finance cost, not a normal allowable expense. Putting it in the wrong category, or including the capital repayment part of your mortgage, throws off your figures. Getting the treatment right each quarter keeps your running tax estimate honest. We cover the filing side in our MTD for landlords guide and the wider deduction rules in allowable expenses for landlords.
VoxaMTD handles the finance-cost treatment for you and files to HMRC for free. Start free
This guide is general information about Section 24 for landlords in England and is not tax advice. The rules and figures are based on HMRC guidance current at the time of writing; thresholds change, and your position depends on your circumstances. Check GOV.UK or speak to a qualified tax adviser before acting.