Section 24 & Mortgage Interest
Since April 2020, landlords can no longer deduct mortgage interest directly from rental income. Instead, HMRC applies a basic-rate tax reduction — 20% of a capped amount, taken off the tax bill — but higher-rate taxpayers still pay significantly more. Here's what this means for your MTD reporting.
Important legal note
This page is educational only and not tax advice. Tax law is complex and depends on your individual circumstances. Always consult a qualified tax adviser before making decisions.
What is Section 24?
Section 24 of the Finance (No. 2) Act 2015 gradually removed the ability for individual landlords to deduct mortgage interest — and other residential property finance costs — from their rental income when calculating taxable profit.
The rules were phased in from 2017 and fully in force from April 2020. Since then, finance costs are no longer treated as a business expense against rental income. Instead, landlords get a basic-rate tax reduction — 20% of the lowest of their finance costs, their property profit, and their adjusted total income above the Personal Allowance — subtracted directly from their final tax bill. Costs above that cap aren't lost; they carry forward to later years, and the reduction can't create a refund.
Source: HMRC — tax relief for residential landlords, how it's worked out: “The tax reduction can't be used to create a tax refund”, and any unused amount “is carried forward to calculate the basic rate tax reduction in the following years”.
This distinction matters enormously for higher and additional rate taxpayers, who effectively lose the extra tax relief they previously received.
Finance costs covered by Section 24
- Mortgage interest on residential buy-to-let properties
- Interest on loans taken out to fund improvements to rental properties
- Mortgage arrangement fees (spread over the mortgage term)
Note: Section 24 does not apply to commercial property or limited company landlords. The furnished holiday letting (FHL) tax regime was abolished from April 2025, so former FHLs are now subject to Section 24 — read our FHL tax changes guide.
It also applies to a residential let abroad on the same basis as a UK one. HMRC's policy paper covers individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs — see our foreign property guide.
Worked Examples
The same landlord, same property — very different tax bills depending on income tax rate.
Figures use England, Northern Ireland and Wales rates; Scottish rates differ.
Shared assumptions
£18,000
Annual rent
£3,000
Other expenses
£9,000
Mortgage interest
£12,570
Personal allowance (used against other income)
Basic-rate taxpayer (20%)
e.g. £20,000 other income + £15,000 property profit = £35,000 total, under £50,270
Higher-rate taxpayer (40%)
e.g. £60,000 other income + £15,000 property profit = £75,000 total, over £50,270
The higher-rate taxpayer pays £3,000 more than the basic-rate taxpayer, even though their rental situation is identical. Under the old rules (pre-2020), the £9,000 interest would have been deducted as an expense by both landlords, giving the higher-rate taxpayer an extra £1,800 tax relief that no longer exists.
How Section 24 Works with MTD Reporting
Under Making Tax Digital, landlords must submit quarterly updates summarising their income and expenses. Mortgage interest is reported as a separate expense category — “residential property finance costs” — rather than being bundled with other expenses. HMRC's digital record-keeping direction requires anyone with residential property finance costs to “create a separate digital record for these costs and send them separately from other expenses”.
Critically, this category is not deducted from your taxable profit in your quarterly submissions. It is recorded separately throughout the year so HMRC can calculate the capped basic-rate tax reduction at the Final Declaration stage (the end-of-year submission that replaces the Self Assessment return).
This applies even if you qualify for three-line accounts (simplified reporting for turnover under £90,000). Finance costs must still be identified separately from your consolidated expenses total — they can't be folded in, since HMRC needs the figure on its own to calculate the reduction.
MTD reporting flow for finance costs
- 1
Quarterly updates (Q1–Q4)
Record mortgage interest payments under 'residential property finance costs' each quarter. These are submitted to HMRC but do not reduce your quarterly profit figure.
- 2
Final Declaration
HMRC calculates your total tax liability and applies the capped basic-rate tax reduction on your finance costs. This is where the Section 24 reduction is applied. (EOPS is no longer a separate step — you go straight from quarterly updates to the Final Declaration.)
Key Takeaways
Record finance costs separately
Do not mix mortgage interest with other expenses. MTD software (including #MTDone!) tracks this as its own category.
Higher-rate taxpayers are most affected
If you pay 40% or 45% income tax, Section 24 significantly increases your effective tax rate on rental income compared to pre-2020 rules.
The reduction applies at Final Declaration
Your quarterly submissions show the gross finance costs. The capped 20% reduction only reduces your tax bill at the final year-end step — it can't create a refund.
Limited companies are unaffected
Section 24 only applies to individual landlords. Properties held in a limited company are taxed under Corporation Tax rules, where mortgage interest remains fully deductible.