Why Section 24 changes everything for higher rate taxpayers

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Section 24 of the Finance Act 2015 changed the rules for how landlords can claim tax relief on mortgage interest. If you're a higher rate taxpayer, this change can turn a profitable buy-to-let into a loss-maker on paper—even while cash is flowing into your bank account.

Understanding Section 24 is essential for any serious UK property investor.

What Section 24 Actually Does

Before Section 24, landlords could deduct their mortgage interest from their rental income before calculating tax. If you earned £12,000 in rent and paid £6,000 in mortgage interest, you were taxed on £6,000 of profit.

After Section 24, you can no longer deduct mortgage interest from your rental income. Instead, you receive a tax credit worth 20% of your mortgage interest.

This might not sound like a big change, but for higher rate taxpayers, it's dramatic.

An Example That Shows the Impact

Let's say you have a buy-to-let with:

Annual rent: £12,000
Mortgage interest: £6,000
Other expenses: £2,000
Net profit before tax: £4,000

Before Section 24 (40% taxpayer):

Taxable profit: £12,000 - £6,000 - £2,000 = £4,000
Tax at 40%: £1,600
After-tax profit: £2,400

After Section 24 (40% taxpayer):

Taxable profit: £12,000 - £2,000 = £10,000 (no mortgage interest deduction)
Tax at 40%: £4,000
Tax credit (20% of £6,000): £1,200
Net tax: £2,800
After-tax profit: £1,200

Your after-tax profit has halved. And in some scenarios, you can end up owing more in tax than you receive in cash.

The "Phantom Income" Problem

The most insidious aspect of Section 24 is that it can push you into a higher tax bracket based on income you never actually received.

Your mortgage interest is still going out the door, but because it's no longer deductible, HMRC sees you as having more income than you do. This can:

Push you over the higher rate threshold
Reduce your personal allowance (if you're near £100k)
Affect your eligibility for child benefit

This is why Section 24 modelling is so important when analysing deals.

Strategies to Mitigate Section 24

Use a limited company. Companies can still deduct mortgage interest as an expense. However, company structures have their own costs and complications, and transferring existing properties into a company triggers stamp duty and capital gains tax.

Invest in lower-yielding, higher-growth areas. If mortgage interest is a smaller percentage of your rental income, Section 24 hurts less. This often means accepting lower cashflow in exchange for capital growth.

Pay down mortgages. Less debt means less mortgage interest and less Section 24 impact. This is conservative but effective.

Consider joint ownership with a lower-rate taxpayer. If your spouse pays basic rate tax, shifting ownership to them can reduce the Section 24 burden.

Why Your Analysis Tool Needs to Handle This

Most basic yield calculators ignore Section 24 entirely. They show you a gross yield, maybe a net yield, and call it a day.

But if you're a higher rate taxpayer, a deal that looks profitable on a basic calculator might actually cost you money after tax.

DealSheet AI models Section 24 correctly. You tell it your tax position, and it shows you what you'll actually take home after all taxes—not just a theoretical yield that ignores reality.

Conclusion

Section 24 has fundamentally changed buy-to-let economics for higher rate taxpayers. A deal that works for a basic rate taxpayer might be a disaster for someone paying 40% or 45% tax.

The only way to know for sure is to model it properly. DealSheet AI includes full Section 24 handling so you can see the true after-tax picture before you commit to a purchase.

Don't let tax surprises destroy your property portfolio. Analyse every deal with Section 24 in mind.