How rental income is taxed under Section 24
Before 2017, landlords could deduct mortgage interest directly from rental income before calculating tax. A higher rate taxpayer with £10,000 rent and £6,000 mortgage interest would be taxed on just £4,000 profit. Section 24 ended this. From 2020, all landlords must declare the full rental income minus only allowable non-finance expenses, pay tax on that amount, and then receive a 20% tax credit on the mortgage interest separately.
Calculate taxable rental profit
Start with gross rental income and deduct allowable expenses: letting agent fees, property repairs and maintenance, insurance, utility bills you pay, ground rent and service charges, and accountancy fees. Mortgage interest is specifically excluded from this deduction. The result is your taxable rental profit.
Add rental profit to your other income
Rental profit sits on top of your other income for tax purposes. If you earn £40,000 from employment and make £8,000 rental profit, your total income for the year is £48,000. The rental profit is taxed at your marginal rate, 20% if it stays within the basic rate band, 40% if it pushes you into the higher rate band, which happens at £50,270.
Apply the 20% finance cost tax credit
After calculating the tax on your rental profit, you receive a credit equal to 20% of your mortgage interest. For a basic rate taxpayer this is neutral, 20% tax offset by a 20% credit. For a higher rate taxpayer paying 40% on that income, they keep only a 20% offset, meaning they effectively pay 20% tax on money spent on mortgage interest. This is the Section 24 trap.
The Section 24 trap for higher rate landlords: If mortgage interest exceeds rental profit, it is theoretically possible to have a tax bill on a loss-making property. A landlord with £12,000 rent, £2,000 expenses, and £11,000 mortgage interest has a taxable profit of £10,000 but a cash loss of £1,000. At 40% they pay £4,000 tax on the profit, then receive a £2,200 credit (20% of £11,000), leaving a net tax bill of £1,800 on a property that lost money in cash terms.
| Expense type | Deductible against rental income? |
|---|---|
| Letting agent fees | Yes |
| Property repairs and maintenance | Yes (maintenance, not improvements) |
| Landlord insurance | Yes |
| Ground rent and service charges | Yes |
| Utility bills (where landlord pays) | Yes |
| Accountancy and professional fees | Yes |
| Mortgage interest | No, 20% tax credit applies instead |
| Capital improvements | No, deductible against CGT on sale |
| Mortgage capital repayments | No |
Frequently asked questions
No. Section 24 only applies to individual landlords, not limited companies. A company can still deduct mortgage interest as a business expense in full, which is why some landlords have considered incorporating. However, incorporation involves Stamp Duty Land Tax on the transfer, Capital Gains Tax on any gain crystallised, and the additional complexity of running a company. The economics of incorporating an existing portfolio rarely stack up unless the portfolio is large and the landlord is a higher rate taxpayer with significant mortgage debt. Always take specialist property tax advice before incorporating.
No, not against rental income. Capital improvements, works that add value to the property rather than simply maintaining it, are not deductible against rental income. A new kitchen replacing a worn-out kitchen of similar quality is maintenance and is deductible. A high-spec kitchen upgrade where none previously existed is a capital improvement and is not. Capital improvement costs are instead added to the base cost of the property for CGT purposes when you eventually sell, reducing the taxable gain. Keep all receipts and records of capital expenditure from the day you acquire the property.
Rent a Room allows you to earn up to £7,500 per year tax-free from letting a furnished room in your own home. This applies whether you own or rent your home, as long as it is your main residence and the room is furnished. If your rental income from a lodger exceeds £7,500, you can choose to be taxed on the excess above £7,500 or on the actual profit after expenses, whichever gives the lower tax bill. The scheme does not apply to buy-to-let properties, only to rooms let in your main home.
You report rental income on a self assessment tax return in the UK property pages (SA105). You must register for self assessment if you have rental income above £1,000 per year. The return covers the tax year to 5 April and must be filed online by 31 January the following year. You will need to report gross rents, allowable expenses, mortgage interest (separately, for the 20% credit calculation), and any other relevant figures. Keep all letting agreements, receipts, bank statements, and expense records for at least six years.
Related calculators
Tax Toolkit UK provides free calculators for guidance purposes only. Results are estimates for 2026/27. Rental tax can be complex. Always consult a qualified accountant for your specific situation.