Buy-to-let yield & Section 24 tax
Two numbers every landlord needs: the rental yield, and the real tax after Section 24. Since 2020/21 mortgage interest is not deductible, you get a 20% credit instead, which can quietly raise a higher-rate landlord's tax.
How Section 24 changes the maths
Before 2017 a landlord deducted mortgage interest from rental income and paid tax on the profit that was left. Section 24 removed that. Now the full rent minus running costs is taxed, and the interest comes back only as a 20% tax reducer. If you are a basic-rate taxpayer the two roughly cancel out. If any of the rental profit falls in the 40% or 45% band, you pay tax at that rate on income you never really kept, because the mortgage absorbed part of it, and you only get 20% back.
There is a second trap. The rental profit is added to your other income before the credit is applied, so it can push you into a higher band, restrict your Personal Allowance above £100,000, or trigger the High Income Child Benefit Charge, none of which the 20% credit reverses.
Worked example
Rent of £14,400, running costs of £2,500 and mortgage interest of £7,000, on top of £55,000 of salary. Taxable rental profit is £11,900 (rent minus costs, interest not deducted). That profit is taxed at the higher rate, costing £4,760, then a 20% credit of £1,400 is deducted, leaving a bill of £3,360. The real cash profit after the mortgage was only £4,900, so the effective tax rate is 68.6%. Under the old rules the bill would have been £1,960, so Section 24 costs this landlord £1,400 a year.
Common questions
What is Section 24?
Section 24 of the Finance (No. 2) Act 2015 removed the ability of individual landlords to deduct mortgage interest and other finance costs from rental profit. Since 2020/21 you instead get a tax reducer worth 20% of those costs. For a basic-rate landlord the effect is broadly neutral, but for a higher-rate landlord it raises the tax bill.
Why does my tax rate look higher than 40%?
Because the rent is taxed before interest is taken off, but you only get relief on the interest at 20%. On the money you actually keep after paying the mortgage, the effective rate can sit well above your headline band, and in some cases the property can be taxed into a loss. This is the core Section 24 problem.
How is rental yield calculated here?
Gross yield is annual rent divided by the property value. Net yield is annual rent minus running costs (letting fees, insurance, maintenance, ground rent) divided by the value. Net yield here excludes mortgage interest, because yield measures the property, while the mortgage is a financing choice.
Does Section 24 affect limited company landlords?
No. The restriction applies to individuals. A company that owns rental property deducts finance costs against profit in the normal way and pays Corporation Tax. That is why many higher-rate landlords have moved property into companies, though that brings its own stamp duty and administration costs.
What counts as a finance cost?
Mortgage interest is the main one. It also covers interest on loans to buy furnishings, and incidental costs of getting a loan such as arrangement fees. Capital repayments are not a finance cost and were never deductible.