If you let residential property and have a mortgage on it, Section 24 is one of the most significant tax changes you face as a landlord. Since it was fully phased in for the 2020-21 tax year, landlords can no longer deduct mortgage interest as a straightforward expense. Instead, they receive a basic rate tax credit worth 20% of their finance costs. For many higher and additional rate taxpayers, this has significantly increased the tax they pay on rental income.
This guide explains what Section 24 is, how it changes your tax calculation, who it affects, and how it works within Making Tax Digital.
Section 24 of the Finance (No. 2) Act 2015 introduced a restriction on the way residential landlords can claim relief on finance costs, most commonly mortgage interest. Before the change, mortgage interest was deducted from rental income as an expense in the same way as repairs or insurance premiums, reducing your taxable profit directly. After Section 24, this treatment changed entirely.
The new rules were phased in gradually over four tax years starting in 2017-18 and were fully in force from 6 April 2020. From that point onwards, residential landlords cannot deduct any finance costs as an expense. Instead, they receive a tax credit equal to 20% of their total finance costs, which is applied against their final income tax liability.
The distinction matters more than it might first appear. Under the old system, mortgage interest reduced your rental profit before tax was calculated. Under Section 24, the interest does not reduce your profit at all — it affects only your tax bill at the end, and only at the basic rate, regardless of how much income tax you actually pay.
Finance costs covered by Section 24 include mortgage interest on residential property loans, interest on loans taken out to improve or buy residential property, and arrangement fees and other finance charges on these loans. The capital repayment element of a mortgage has never been tax-deductible, so Section 24 only affects the interest element.
Section 24 applies to individual landlords letting residential property in the UK. It does not apply to commercial property (finance costs on commercial lets can still be deducted), limited companies (which follow corporation tax rules and can deduct mortgage interest in full), or furnished holiday lets — though the FHL regime was abolished from 6 April 2025, and properties that previously qualified as FHLs are now subject to Section 24.
Section 24 hits higher and additional rate taxpayers hardest. If you pay tax at 20%, the restriction leaves you broadly in the same position as before, because the 20% credit replaces what would have been a 20% deduction. If you pay tax at 40% or 45%, you lose the additional relief that the old system provided.
Consider a landlord with gross rental income of £20,000, mortgage interest of £8,000, and other allowable expenses of £4,000.
Under the old rules: Taxable rental profit = £20,000 - £8,000 - £4,000 = £8,000. A higher rate (40%) taxpayer pays: £8,000 × 40% = £3,200.
Under Section 24: Taxable rental profit = £20,000 - £4,000 = £16,000 (mortgage interest is not deducted). Tax credit = £8,000 × 20% = £1,600. Tax at 40% = £16,000 × 40% = £6,400. Less credit: £6,400 - £1,600 = £4,800. The higher rate taxpayer now pays £1,600 more in tax than under the old rules.
For a basic rate (20%) taxpayer, the position is broadly neutral: tax of £16,000 × 20% = £3,200, less the £1,600 credit = £1,600 — the same as under the old rules.
Because mortgage interest no longer reduces your rental profit, your taxable income is inflated. This higher figure is what HMRC uses to determine your marginal rate. A landlord who was a basic rate taxpayer under the old system might now appear to be a higher rate taxpayer, because their gross income figure pushes them above the higher rate threshold. They receive the 20% credit, but they pay tax at 40% on the inflated profit figure.
The same effect can affect entitlement to the personal allowance, which is withdrawn for individuals with income over £100,000. If your inflated rental income figure pushes your total income above that level, you may lose some or all of your personal allowance.
Under Making Tax Digital, finance costs are not entered as part of your general expenses total. Your MTD software has a dedicated field for finance costs. When you enter your quarterly figures, you will see a separate input for mortgage interest and other finance charges. The software, and ultimately HMRC, uses that figure to calculate the 20% tax credit at the Final Declaration stage. You do not need to calculate the credit yourself.
Section 24 is fully in place and will not be reversed. Practical responses include increasing rents where the market allows, reducing mortgage debt through overpayments, or considering restructuring to a limited company. Incorporation can eliminate the Section 24 restriction because companies follow corporation tax rules, but transferring properties to a company triggers capital gains tax and stamp duty land tax, and the combined transaction costs are often significant. Professional advice is essential before incorporating.
For landlords with complex situations — large portfolios, income near the higher rate threshold, or properties near the £100,000 personal allowance withdrawal zone — specialist tax advice is particularly valuable.
SimplifyMTD handles the Section 24 calculation automatically. You enter your mortgage interest and other finance costs in the dedicated finance costs field, and SimplifyMTD ensures they are recorded and submitted to HMRC correctly. At the Final Declaration stage, HMRC applies the 20% credit against your tax liability. You do not need to calculate it yourself. See our MTD FAQs for more, or visit the SimplifyMTD homepage.