Section 24 Tax Impact Calculator

Section 24, also known as the Tenant Tax or Landlord Tax, fundamentally changed how UK property investors are taxed on their rental income. Introduced in the Finance Act 2015 by then-Chancellor George Osborne, this legislation progressively restricted mortgage interest relief for individual landlords over four years, reaching full implementation by April 2020. Understanding its impact is crucial for any property investor holding buy-to-let properties in their personal name.

The Old Rules (Pre-2017)

Before Section 24, landlords could deduct their full mortgage interest payments from rental income before calculating their tax bill. This meant if you received £24,000 in annual rent, paid £12,000 in mortgage interest, and had £3,000 in other expenses, your taxable profit was just £9,000 (£24,000 - £12,000 - £3,000).

For a higher rate taxpayer at 40%, the tax on £9,000 profit would be £3,600, leaving £5,400 after tax. This system treated mortgage interest like any other business expense, which many considered fair and logical.

The New Rules (Section 24 Restrictions)

Under Section 24, mortgage interest is no longer deductible from rental income. Instead, landlords receive a basic rate (20%) tax credit on their mortgage interest. Using the same example:

- Taxable profit: £21,000 (£24,000 rent - £3,000 expenses only) - Tax at 40%: £8,400 - Less 20% credit on £12,000 interest: £2,400 - Final tax bill: £6,000

This represents a £2,400 increase in tax liability compared to the old rules—a 67% rise. The landlord's after-tax income drops from £5,400 to £3,000, a 44% reduction in actual take-home profit.

Why Higher Rate Taxpayers Suffer Most

The mathematics of Section 24 create a particularly harsh scenario for higher rate (40%) and additional rate (45%) taxpayers. Under the old system, every pound of mortgage interest reduced taxable income by a pound, saving 40p or 45p in tax. Under Section 24, the same pound only provides 20p relief—regardless of your actual tax rate.

This disparity means basic rate taxpayers see minimal impact (they were only saving 20% anyway), while higher rate taxpayers effectively lose 20-25% of their mortgage interest relief. For landlords with high-value mortgages, this can transform profitable properties into loss-makers on an after-tax basis.

The Phantom Income Problem

Perhaps the most controversial aspect of Section 24 is what's known as "phantom income." Because mortgage interest no longer reduces your taxable income, landlords can face tax bills on profits they never actually received.

Consider an extreme case: £24,000 rent, £20,000 mortgage interest, £4,000 expenses. Under the old rules, taxable profit was £0. Under Section 24, taxable profit is £20,000, creating a tax bill of £8,000 (at 40%) with only a £4,000 credit—leaving £4,000 tax due on zero actual profit.

This scenario has forced some landlords to sell properties or restructure their portfolios, particularly those with interest-only mortgages during periods of low interest rates.

Band Creep Effect

Section 24 can also push landlords into higher tax bands. Because mortgage interest no longer reduces taxable income, your reported income increases dramatically. A basic rate taxpayer whose rental "profits" (before interest) take them over £50,270 suddenly becomes a higher rate taxpayer—even if their actual cash profit is modest.

Limited Company Alternative

One response to Section 24 has been the shift toward holding properties in limited companies. Companies can still deduct mortgage interest as a business expense, paying corporation tax (19-25%) on actual profits. However, this solution isn't straightforward:

- Transferring existing properties triggers SDLT and CGT - Company mortgages often have higher interest rates - Lower maximum LTV ratios available - Professional fees for accounts and compliance - Extracting profits requires dividend payments (additional tax)

Our calculator compares the effective tax rates between personal and company ownership, helping you understand whether restructuring makes financial sense for your situation.