You made £6,000 renting out your flat last year. So why does HMRC tax you as if you made £12,000?
That gap is Section 24 at work, and it is the single most misunderstood rule in personal buy-to-let tax. It does not change how much rent you collect or how much mortgage interest you pay. It changes the order in which the sums are done, and for higher-rate landlords that reordering quietly hands a slice of your profit to the Treasury.
What Section 24 actually changed
Here is Section 24 explained without the jargon. Before the rules changed, a landlord holding property in their own name treated mortgage interest like any other cost. You took your rent, subtracted the interest and other allowable expenses, and paid tax on what was left.
Since 6 April 2020, individual landlords can no longer deduct finance costs (mortgage interest, and the interest element of most buy-to-let borrowing) from rental income at all. Instead you pay tax on the rent, then receive a flat 20% "tax reducer" on the interest. The change was phased in from April 2017 and has been fully in force since the 2020-21 tax year (see gov.uk, "Changes to tax relief for residential landlords", linked below).
For a basic-rate taxpayer, a 20% credit is worth roughly the same as the old 20% deduction, so the sting is mild. For a higher-rate taxpayer, the old deduction was worth 40%. Swapping it for a 20% credit halves the relief on every pound of interest.
The phantom profit, in one worked example
Take a landlord earning £55,000 in their day job, which already makes them a higher-rate taxpayer for 2025-26 (the 40% band runs from £50,270 to £125,140). Their flat brings in £12,000 rent a year, with £6,000 of mortgage interest and, to keep the illustration clean, no other costs.
| Per year | Old rules (interest deducted) | Section 24 (20% credit) |
|---|---|---|
| Rent received | £12,000 | £12,000 |
| Taxable rental profit | £6,000 | £12,000 |
| Income tax at 40% | £2,400 | £4,800 |
| 20% credit on £6,000 interest | n/a | -£1,200 |
| Tax bill | £2,400 | £3,600 |
| Cash kept after interest and tax | £3,600 | £2,400 |
The real profit never changed. Rent minus interest is £6,000 either way. But the tax bill jumped from £2,400 to £3,600. That is £3,600 of tax on £6,000 of genuine profit, an effective rate of 60% on the money you actually keep. The extra £1,200 is tax on "phantom profit": income the taxman counts but the mortgage lender has already taken.
When rates rise, the phantom grows
The maths gets sharper as borrowing costs climb. Say the same flat's interest rises to £9,000 after a remortgage:
- Real cash profit: £12,000 rent minus £9,000 interest = £3,000
- Section 24 tax: £4,800 (40% of £12,000) minus £1,800 credit = £3,000
- Cash kept: £12,000 - £9,000 - £3,000 = £0
Your entire real profit has gone in tax. Push interest higher still and a paper profit can turn into a cash loss after tax. This is why Section 24 bit hardest through 2023-24 as the Bank of England base rate rose. Rates move often, so check current mortgage figures before you model your own numbers.
You can run your own salary and interest through the Section 24 tax calculator to see where you land before and after the restriction.
The second, hidden hit: being pushed up a band
Because Section 24 makes you declare the full rent as income, your total taxable income is now higher on paper. That "grossing up" can have knock-on effects that never show up in the headline tax rate:
- The 40% band. A basic-rate employee can be tipped into higher-rate tax purely because the un-deducted rent lifts their total income over £50,270.
- The £100,000 trap. Above £100,000, the personal allowance tapers away by £1 for every £2 earned, an effective 60% marginal rate until it disappears at £125,140. Grossed-up rent can drag you into that zone.
- Child benefit. The High Income Child Benefit Charge starts once the higher earner's income passes £60,000 (raised from £50,000 on 6 April 2024, per gov.uk). Extra paper income can trigger or increase it.
None of these appear in the simple 40% sum, which is why so many landlords are caught out by their self-assessment bill.
Why basic-rate landlords feel it less
If your total income comfortably sits inside the basic-rate band, the 20% credit roughly matches the old 20% deduction, so Section 24 is close to neutral for you. The risk is that a strong rental year, or a rent increase, quietly grosses you up over £50,270, at which point the top slice of your income starts costing 40% while the relief stays fixed at 20%.
What you can and can't do about it
There is no way to reinstate the old deduction as an individual, but there are legitimate ways to reduce the damage:
- Non-finance costs still deduct in full. Repairs, letting fees, insurance, ground rent and the like come off rental income as normal. Only finance costs are restricted.
- Companies sit outside Section 24. A limited company still deducts mortgage interest in full before tax. Incorporating is not a free lunch, though: transferring property can trigger stamp duty and capital gains tax, and company mortgage rates are often higher.
- Ownership split. For couples, weighting ownership toward the lower earner can keep more profit inside the basic-rate band.
- Reducing borrowing. Less interest means less restricted relief, though tying up cash has its own trade-offs.
Each of these depends on your own figures, and the incorporation route in particular needs proper advice before you act.
The takeaway
Section 24 does not tax your profit. It taxes your turnover and then hands back a fixed 20% sliver, which is why a higher-rate landlord can face an effective rate of 60% or more on profit they never keep. Model your real numbers, watch the band thresholds, and treat the "phantom profit" as the planning problem it is.
This is general information, not tax or financial advice.
Sources: gov.uk, "Changes to tax relief for residential landlords: how it's worked out" (https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-worked-examples); Income Tax rates and bands 2025-26 (https://www.gov.uk/income-tax-rates); High Income Child Benefit Charge (https://www.gov.uk/child-benefit-tax-charge).
