You see 6.6% on the listing and it sounds healthy. Then the year ends, you add up what actually landed in your account, and the real return looks nothing like that. So which number is the honest one, and where did the rest go?
The short answer: the listing figure is a gross yield, and the money you keep is a net yield. On a typical geared property held in your own name, the gap between the two is often 1.5 to 3 percentage points. A chunk of that is ordinary running costs. The rest is Section 24, the mortgage-interest tax change that most yield sums quietly ignore.
Here is one property worked all the way through so you can see exactly where each point goes.
The two numbers, quickly
- Gross yield = annual rent ÷ property value (or purchase price). It ignores every cost.
- Net yield = (annual rent − running costs) ÷ property value. It is what the property earns before finance.
Gross is fine for comparing listings at a glance. It is a poor guide to what you actually take home, because two properties on the same 6.6% gross can hand you very different amounts once costs and tax are in.
One property, three layers of yield
Take a £200,000 terraced house let at £1,100 a month, so £13,200 a year. Bought with a 75% interest-only mortgage (£150,000) at 5.5%, which is £8,250 of interest a year. Rates move constantly, so treat 5.5% as an example and check current figures for your own deal.
Here are the running costs, as an annual worked example:
| Running cost | Amount |
|---|---|
| Letting & management (10% of rent) | £1,320 |
| Landlord insurance | £300 |
| Repairs & maintenance allowance | £1,000 |
| Safety certificates (gas, EICR, servicing) | £200 |
| Voids & arrears allowance (~4%) | £530 |
| Accountancy & admin | £150 |
| Total | £3,500 |
Layer 1: the gross yield
£13,200 ÷ £200,000 = 6.6%. This is the number on the advert.
Layer 2: take off the running costs
Rent minus the £3,500 of costs above leaves £9,700. That is your net operating income, before any mortgage or tax.
£9,700 ÷ £200,000 = 4.85%.
Running costs alone have taken 1.75 points off the headline, and we have not touched the mortgage yet.
Layer 3: add the Section 24 drag
This is the part that catches people out. Since April 2020, individual landlords can no longer deduct mortgage interest as a normal expense. Instead you pay tax on the rental profit before interest, then get a 20% basic-rate tax credit on the interest (gov.uk: tax relief changes for residential landlords). Companies are unaffected and still deduct interest in full.
For a higher-rate taxpayer, the maths on this property:
- Taxable profit = rent − running costs = £13,200 − £3,500 = £9,700 (interest is not deductible).
- Tax at 40% = £3,880.
- Less the 20% credit on £8,250 of interest = £1,650.
- Tax due = £2,230.
Under the old rules, where interest came off first, the taxable profit would have been just £1,450 and the tax £580. So Section 24 costs this landlord an extra £1,650 a year - which is simply the 20-point difference between their 40% rate and the 20% credit, applied to the interest.
Knock that £1,650 off the £9,700:
£8,050 ÷ £200,000 = 4.03%.
The gap in one line
| Layer | Annual figure | Yield on £200k |
|---|---|---|
| Gross rent | £13,200 | 6.6% |
| Less running costs | £9,700 | 4.85% |
| Less Section 24 drag (higher rate) | £8,050 | 4.03% |
From 6.6% to 4.03% is a 2.57 point gap. Running costs did the first 1.75 points; Section 24 did the last 0.82.
The size of the Section 24 slice depends on who you are:
- Basic-rate taxpayer: you already only get 20% relief, so Section 24 changes little. Your gap is mostly the running-cost 1.75 points - the bottom of the range.
- Higher-rate taxpayer: you lose 20% of your interest bill, as above - the middle to top of the range.
- More gearing or a higher rate: a bigger loan means a bigger interest figure for the 20-point penalty to bite on, pushing the gap toward the full 3 points. In some cases the rental profit even tips you into a higher band, which widens it further.
That is the 1.5 to 3 point spread in practice. It is not a rule of thumb plucked from the air; it falls out of the arithmetic once you stop pretending interest is deductible.
Why this one is genuinely hidden
Two reasons it sneaks past people. First, most yield calculators and listing pages stop at gross, or at best net of running costs, and never model tax at all. Second, Section 24 does not show up as a line item you pay - it shows up as tax you cannot reclaim, so there is no invoice to make it feel real. It only surfaces when your Self Assessment bill is larger than your actual cash profit suggests it should be.
Work out your own number
The point of the three-layer view is that you can rebuild it for any property in a couple of minutes. Start with the gross and net-of-costs figures using the rental yield calculator, then add your own tax layer on top: take rent minus running costs, apply your marginal rate, and subtract the 20% credit on your interest. The gap you get is your personal spread, and it tells you far more than the advert's 6.6% ever could.
A few habits that keep the gap honest:
- Use a real management figure even if you self-manage - your time has a cost, and you may not always self-manage.
- Put in a voids and arrears allowance every year, not just the years it happens.
- Model tax at your band, not a generic one. The same property can be a 4.8% or a 3.9% net yield depending on the owner.
If the higher-rate drag looks punishing, that is the whole reason many landlords now compare personal ownership against a limited company, where interest stays fully deductible. That is a bigger decision with its own costs and is worth proper advice before acting.
This is general information, not tax or financial advice.
The listing yield is a starting line, not a finishing one. Once running costs and Section 24 are in the picture, a 6.6% gross can be a 4% keeper - and knowing which one you are buying is the difference between a plan and a hope.
