Section 24 has transformed the tax landscape for buy-to-let landlords since its full implementation in April 2020. What was once a straightforward mortgage interest deduction is now a complex tax credit system that can significantly impact your annual tax bill.
Understanding exactly how much Section 24 costs you each year is crucial for making informed decisions about your property portfolio. This guide walks you through calculating your annual Section 24 cost and shows you the practical steps to work out the real impact on your finances.
How Section 24 Works: The Basics
Before diving into calculations, it's worth understanding what changed. Prior to Section 24, landlords could deduct mortgage interest from their rental income before calculating tax. Now, you receive a 20% tax credit instead.
The key difference is timing and rates. Previously, if you paid higher-rate tax at 40%, your mortgage interest saved you 40p for every pound spent. Now, regardless of your tax rate, you only get 20p back through the tax credit.
For a landlord paying £12,000 annual mortgage interest who falls into the 40% tax band, the old system would have saved £4,800 in tax. Under Section 24, they receive just £2,400 as a tax credit — a difference of £2,400 per year.
Step-by-Step Section 24 Tax Calculator
Working out your annual Section 24 cost requires gathering specific figures from your property portfolio. Here's the systematic approach:
Step 1: Calculate Your Total Annual Mortgage Interest
Add up all mortgage interest payments across your buy-to-let properties for the tax year. This includes interest on purchase mortgages, remortgages, and any additional borrowing secured against rental properties.
Don't include capital repayments — only the interest portion counts for Section 24 calculations.
Step 2: Work Out Your Rental Profit Without Interest Deduction
Calculate your rental income minus all allowable expenses except mortgage interest. This gives you your "gross" rental profit before the Section 24 restrictions apply.
For example: £30,000 rental income minus £5,000 in repairs, insurance, and other costs equals £25,000 gross rental profit.
Step 3: Determine Your Marginal Tax Rate
Add your gross rental profit to your other income to find your marginal tax rate. This is crucial because Section 24's impact varies dramatically depending on whether you're a basic rate (20%), higher rate (40%), or additional rate (45%) taxpayer.
Step 4: Calculate the Section 24 Cost
The annual cost equals: (Your marginal tax rate - 20%) × Annual mortgage interest
For a higher-rate taxpayer with £15,000 annual mortgage interest: (40% - 20%) × £15,000 = £3,000 additional tax per year.
Practical Example: Portfolio Landlord Calculation
Consider Sarah, who owns three buy-to-let properties generating £45,000 annual rental income. Her expenses break down as follows:
- Mortgage interest: £18,000
- Repairs and maintenance: £4,000
- Insurance and other costs: £3,000
- Other income (salary): £35,000
Under the old system, Sarah's taxable rental income would have been £20,000 (£45,000 - £25,000 total expenses). Combined with her salary, her total taxable income was £55,000, putting her in the higher rate band.
Under Section 24, her taxable rental income becomes £38,000 (£45,000 - £7,000 non-mortgage expenses). Her total taxable income rises to £73,000, firmly in the higher rate band.
Sarah's Section 24 annual cost: (40% - 20%) × £18,000 = £3,600
When Section 24 Pushes You Into Higher Tax Bands
One of Section 24's most painful aspects is how it can push landlords into higher tax brackets. This creates a double hit — not only do you lose the benefit of full mortgage interest relief, but you also pay higher rates on more of your income.
Take Mark, a basic rate taxpayer earning £35,000 from his job plus £25,000 rental income with £15,000 mortgage interest. Pre-Section 24, his total taxable income was £45,000 (all at 20% rate).
Post-Section 24, his taxable income jumps to £60,000, with £10,000 taxed at 40%. His annual Section 24 cost isn't just the lost relief — it's the combination of reduced relief plus higher rates on the additional income.
Using Professional Section 24 Tax Calculators
While manual calculations help you understand the mechanics, professional calculators can handle the complexity more accurately. They account for personal allowances, tax band interactions, and other income sources that affect your overall position.
Many landlords find that working with a property tax specialist provides the most accurate picture. The calculations can become complex when you factor in multiple properties, varying mortgage structures, and interactions with other tax reliefs.
Planning Around Your Section 24 Costs
Once you know your annual Section 24 cost, you can make informed decisions about your portfolio. Some landlords choose to accept the additional cost, while others explore alternatives like incorporation into a limited company structure.
The key is understanding that Section 24 costs aren't just a one-off calculation — they compound year after year. A £3,000 annual cost becomes £30,000 over a decade, making it worth serious consideration in your long-term planning.
For complex situations involving multiple properties or significant mortgage interest payments, speaking with a property tax specialist can help you understand all available options and their long-term implications.