Tax on Rental Income: Why Landlords Pay Tax on Money They Never Keep

Since April 2020 your mortgage interest has not been an allowable expense against rental income. You are taxed on the rent before the interest comes out, then handed a credit worth 20% of it. If you are a basic-rate taxpayer that costs you nothing. If you are a higher-rate taxpayer it is the single largest line on your property tax bill, and in Scotland it is larger again.

Last updated: 3 October 2026

Your taxable profit is bigger than your real profit

Work out rental profit the way any other business would and you would take the rent, subtract what it cost you to earn it, and pay tax on the rest. Mortgage interest is obviously one of those costs. Until 2017 HMRC agreed.

Section 24 of the Finance (No. 2) Act 2015 ended that for private residential landlords. It was phased in over four years from April 2017 and has applied in full since April 2020. Your taxable rental profit is now calculated with no deduction for mortgage interest at all. In exchange you get a tax reducer: a credit worth 20% of your finance costs, taken off the tax bill at the end rather than off the profit at the start.

Those two things are only equivalent if 20% happens to be your tax rate. For a basic-rate taxpayer the maths cancels out exactly and Section 24 costs nothing. For a 40% taxpayer in England, Wales or Northern Ireland, every pound of mortgage interest is taxed at 40% and relieved at 20%, leaving a 20p gap. On £9,000 of interest that is £1,800 a year.

A worked example

Take a landlord earning £50,000 in their day job, letting one property for £24,000 a year, with £4,000 of running costs and £9,000 of mortgage interest. Real profit is £11,000. Here is what each set of rules does with it.

	Pre-2017 rules	Today
Rent received	£24,000	£24,000
Less running costs	£4,000	£4,000
Less mortgage interest	£9,000	not deductible
Taxable profit	£11,000	£20,000
Tax on the profit	£4,346	£7,946
Section 24 credit (20%)	n/a	−£1,800
Tax due	£4,346	£6,146

2026/27 rates, England, Wales and Northern Ireland. Run your own figures in the calculator below.

The same £11,000 of real profit now carries £6,146 of tax instead of £4,346. The landlord's cash position has not changed by a penny. Only the tax calculation has.

The credit has three caps

The 20% reducer is applied to the lowest of three figures, which is where a lot of landlords find they get less relief than they expected:

Your finance costs. This year's mortgage interest plus anything carried forward from earlier years.
Your rental profit. Interest above your profit earns no relief this year, which bites hardest on a heavily mortgaged let.
Your income above the Personal Allowance. If most of your income is already covered by the allowance, there is little tax left for the credit to reduce.

Interest blocked by a cap is carried forward indefinitely rather than lost, and can be used in any later year with enough profit to absorb it. That is worth tracking, because it is money owed back to you and nobody at HMRC will remind you it exists.

Try the calculator

Rental income tax calculator

Put in your rent, costs, mortgage interest and salary to see your tax bill with the Section 24 credit on its own line, and what the restriction costs you against the old rules.

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Scottish landlords pay more, for two separate reasons

Rental profit is non-savings non-dividend income, which is exactly the category the Scottish Parliament has power over. So a Scottish taxpayer pays Scottish rates on rental profit. This follows your own residence and ignores the property's: live in Edinburgh, let a house in Leeds, and the profit is taxed at Scottish rates.

The Section 24 credit does not follow you north. It is defined by reference to the UK basic rate, so it sits at 20% no matter which Scottish band you are in. That produces two compounding effects. Scottish higher rate is 42% rather than 40%, so the gap between tax charged and relief given is 22 points instead of 20. And Scotland's 42% band starts at £43,663 rather than £50,271, so you reach it £6,608 of income earlier.

Take the same landlord from the example above and move them to Scotland:

	England, Wales & NI	Scotland
Rate on the profit	40%	42%
Rate the interest is relieved at	20%	20%
The gap	20 points	22 points
What Section 24 costs	£1,800	£1,980
Total tax due	£6,146	£6,600

2026/27 rates. £24,000 rent, £4,000 costs, £9,000 interest, £50,000 of other income.

The earlier band threshold matters more than the extra 2 points, because it decides how many landlords are caught at all. Our Scotland vs England tax comparison covers where the two systems diverge across all income, and the Scottish income tax calculator shows the full band ladder.

Section 24 can make you a higher-rate taxpayer

The indirect effect is the one that surprises people. Because the interest is added back before your income is banded, Section 24 can push you up a band on money you never kept. A landlord on £40,000 with £20,000 of rent, £2,000 of costs and £12,000 of interest would have been a basic-rate taxpayer under the old rules. Today their taxable profit is £18,000 rather than £6,000, which takes them into higher rate.

Tax on the rent	Pre-2017 rules	Today
England, Wales & NI	£1,200	£2,746
Scotland	£1,751	£4,391

£40,000 of other income, £20,000 rent, £2,000 costs, £12,000 interest, 2026/27 rates.

The Scottish landlord's bill is two and a half times what it would have been. Crossing into higher rate also drags anything else you are taxed on in that year up with it, and if your total income reaches £100,000 the Personal Allowance taper starts on top.

April 2027 widens the gap again

From 6 April 2027 property income gets its own rate ladder in England, Wales and Northern Ireland: 22% basic, 42% higher and 47% additional, each 2 percentage points above the rate on earnings. The Section 24 credit rises to 22% at the same time, so the gap for an rUK higher-rate landlord stays at 20 points while both ends move up.

Scotland is excluded. Tax on this type of income is devolved, so the new rUK ladder stops at the border and Scottish landlords stay on Scottish bands with the credit still at 20%. From April 2027 a higher-rate landlord in England is taxed at 42% with relief at 22%. A higher-rate landlord in Scotland is taxed at the same 42% with relief at 20%. The Finance Act 2026 does contain a power for Holyrood to set its own property rates later, but it is not in force for 2027/28.

When the tax bill survives the loss

The sharpest edge of Section 24 appears when interest is large relative to rent. Because the interest never enters the profit calculation, a property that loses money in cash can still produce a taxable profit.

A higher-rate landlord taking £12,000 of rent, with £2,000 of running costs and £15,000 of mortgage interest, is £5,000 out of pocket before tax. Their taxable profit is £10,000. The credit is capped at 20% of that profit rather than 20% of the full interest, giving £2,000 of relief against £4,000 of tax. They pay £2,000 and finish the year £7,000 down. The £5,000 of interest that earned no relief carries forward.

What actually helps

Pension contributions

A personal pension contribution extends your basic-rate band, which can pull rental profit back out of higher rate. This is the most reliable lever for a landlord sitting just over a threshold, and it works on the same mechanism whether the extra income came from rent or a pay rise.

The £1,000 property allowance

Take the first £1,000 of property income tax-free instead of claiming real costs. It is one or the other, and claiming it also gives up the Section 24 credit, so it only wins on a low-cost, mortgage-free let. The calculator checks both routes and flags the better one.

Claiming everything you are entitled to

Letting agent fees, landlord insurance, repairs, ground rent, service charges, accountancy, and replacement of domestic items such as a washing machine all reduce the profit before Section 24 gets near it. Improvements that go beyond repair do not, though they may reduce Capital Gains Tax when you sell.

Ownership structure

Section 24 applies to individuals, so companies still deduct interest in full. Moving an existing property into a company is a sale at market value, which can trigger Capital Gains Tax and a second round of Stamp Duty or LBTT, and it brings its own running costs. Splitting ownership with a lower-earning spouse is the simpler version of the same idea. Both need an accountant before anything is signed.

Reducing the mortgage

Interest is the thing being penalised, so less of it is worth more to a landlord than to an owner-occupier. Weigh that against what the capital could earn elsewhere with the overpay vs invest calculator.

Reporting it has changed too

Making Tax Digital for Income Tax started on 6 April 2026 for anyone with more than £50,000 of combined self-employment and property income. If that is you, you keep digital records and send HMRC a quarterly summary: 7 August, 7 November, 7 February and 7 May. The Self Assessment return and the 31 January payment deadline both still apply on top. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028, so most landlords are caught within two years.

HMRC is not issuing late-submission penalty points for the first year, with the points system starting from 6 April 2027. Four points brings a £200 penalty.

To see where your own let sits, put your figures into the rental income tax calculator. It shows the Section 24 credit separately, tells you how much interest relief has been pushed into future years, and compares the bill against the pre-2017 rules so you can see what the restriction is actually costing you.

Frequently asked questions

How much tax do I pay on rental income?

Rental profit is added to your other income and taxed at your normal rate: 20%, 40% or 45% in England, Wales and Northern Ireland, or 19% to 48% in Scotland. There is no special landlord rate. The part that catches people out is mortgage interest, which is left out of the profit calculation and given a flat 20% credit against the bill instead.

What is Section 24?

Section 24 of the Finance (No. 2) Act 2015 stopped private residential landlords deducting mortgage interest from their rental profit. It was phased in from April 2017 and has been fully in force since April 2020. You now pay tax on rental income before any interest, then get a tax reducer worth 20% of that interest. For a basic-rate taxpayer the two cancel out. For a higher-rate taxpayer they do not.

Do Scottish landlords pay Scottish tax rates on rental income?

Yes. Rental profit is non-savings non-dividend income, which is the category the Scottish Parliament sets rates for, so Scottish taxpayers pay Scottish rates on it. It follows where you live rather than where the property is: a landlord in Glasgow letting a flat in Manchester pays Scottish rates on the profit. The Section 24 credit works differently, because it is pinned to the UK basic rate and stays at 20% whatever your Scottish band.

Can I really owe tax on a rental that lost money?

Yes, and it is the most common complaint about Section 24. Because mortgage interest is excluded from the profit calculation, a let that costs you more in interest than it earns in rent can still show a taxable profit. A higher-rate landlord taking £12,000 of rent with £2,000 of costs and £15,000 of interest is £7,000 down on the year in cash and still owes £2,000 in tax.

What is the £1,000 property allowance?

You can take the first £1,000 of property income tax-free instead of claiming your real expenses. It is one or the other: claim the allowance and you give up both your actual costs and the Section 24 credit. It wins when your costs are very low, which usually means a mortgage-free property or a small amount of occasional income. Letting a room in your own home is a separate scheme, Rent a Room, worth up to £7,500.

What changes for landlords in April 2027?

From 6 April 2027, property income gets its own rates in England, Wales and Northern Ireland: 22% basic, 42% higher and 47% additional, each 2 percentage points above the rate on earnings. The Section 24 credit rises to 22% at the same time. Scotland is excluded, because income tax on this type of income is devolved to Holyrood, so Scottish landlords keep Scottish bands with the credit still at 20%.