Landlord Tax / Lesson 5 of 9
The finance credit in practice
Two landlords, identical properties, identical mortgages. One pays nearly twice the tax.
The short answer
- ✓ Basic-rate landlords who stay basic rate are broadly unaffected
- ✓ Higher-rate landlords get relief at basic rate only, so pay more
- ✓ The inflated profit can push you into higher rate for the first time
- ✓ Pension contributions extend the basic rate band and can pull you back under thresholds
The same property, two owners
Both landlords own an identical flat. Rent £7,500 is not involved here; these are ordinary buy-to-lets.
Rent received £14,400
Allowable expenses -£3,900
---------
Rental profit (taxable) £10,500
Mortgage interest paid £5,000Landlord A: basic rate taxpayer
Tax on rental profit at 20% £2,100
Less finance credit (20% of £5,000) -£1,000
---------
Tax on the rental £1,100
Under the old rules: 20% of (£10,500 - £5,000) = £1,100
Identical. Basic rate taxpayers are broadly unaffected.Landlord B: higher rate taxpayer
Tax on rental profit at 40% £4,200
Less finance credit (20% of £5,000) -£1,000
---------
Tax on the rental £3,200
Under the old rules: 40% of (£10,500 - £5,000) = £2,200
A £1,000 increase, on identical real-world numbers.The gap is exactly the difference between relief at 40% and relief at 20% on the £5,000 of interest. That is the whole mechanism in one line.
The third case: pushed over the line
The worst outcome belongs to someone whose other income sits just below the higher rate threshold. The inflated rental profit, now including the interest, can push their total income over it. They then pay higher rate on part of their income for the first time and receive relief only at basic rate.
Use the slider on the example above to see where the band boundary falls, and the calculator below to run your own figures.
What landlords actually do about it
| Option | Consideration |
|---|---|
| Transfer or share ownership with a lower-earning spouse | Shifts income to a lower band; needs proper documentation |
| Hold property through a company | Companies still deduct interest, but incorporating has its own tax cost |
| Reduce borrowing | Direct, and removes the problem rather than managing it |
| Increase pension contributions | Extends your basic rate band, which can pull you back under the threshold |
All four have real trade-offs and none is universally right. This is the point in a landlord's tax life where paid advice most often pays for itself.
The bit HMRC does not spell out
Increasing your pension contribution extends your basic rate band, and that can be worth more than it first appears here. It reduces the tax on the rental profit and can simultaneously pull your total income back under thresholds that trigger the personal allowance taper or the child benefit charge. One action, three effects, and it is rarely mentioned in the context of property.
Common mistakes
- Assuming everyone is worse off. Basic rate taxpayers who stay basic rate are broadly neutral.
- Incorporating without modelling it. Transferring property to a company can trigger SDLT and CGT.
- Sharing ownership informally. It needs documenting properly to be effective.
- Ignoring pension contributions as a lever. Extending the basic rate band is often the cheapest fix.
A landlord pushed into higher rate
Where the tax actually comes from
National Insurance, student loan and pension contributions are left out here on purpose, so you can see income tax on its own. The calculator below includes them.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Landlord (Section 24)
See how the mortgage-interest restriction affects the tax on your rental profit.
Since the Section 24 phase-in completed, mortgage interest is no longer deducted from rental profit - instead you get a 20% basic-rate tax credit. Estimate only; rates from 2026/27.
Tax on rental profit
on taxable rental profit
- Taxable rental profit
- Tax before credit
- 20% interest tax credit
- −
- Tax under current (S24) rules
- Tax under old rules
- Extra tax from Section 24
effective tax rate on profit
profit kept after tax
Section 24 costs you
You pay more tax a year than under the old interest-deduction rules - your 20% credit is capped because your profit is lower than your interest.
At your figures the restriction doesn't increase your tax - you're a basic-rate taxpayer, so the 20% credit fully offsets the interest.
Estimate only. Ignores allowances/reliefs beyond those shown and assumes the property is held personally.
Tax as mortgage interest rises
Keeping your other figures fixed, how tax changes from £0 up to roughly double your current interest.
Compare saved scenarios
| Scenario | Profit | Tax (S24) | Extra tax | |
|---|---|---|---|---|
Next steps
Income tax
Tax on all your income
Stamp duty
Tax on a property purchase
Mortgage calculator
Repayments & interest
Looking for something else? Browse all calculators or read our tax guides.
Key takeaways
- ✓ Basic-rate landlords who stay basic rate are broadly unaffected
- ✓ Higher-rate landlords get relief at basic rate only, so pay more
- ✓ The inflated profit can push you into higher rate for the first time
- ✓ Pension contributions extend the basic rate band and can pull you back under thresholds
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. Two landlords have identical properties. One earns £25,000, the other £55,000. Who is worse off under the finance cost rules?
2. How can a pension contribution help a higher-rate landlord?
3. What is a risk of transferring property into a company to escape the rules?
Sources
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