Why has my tax bill gone up when my rental income hasn't changed?

Section 24, fully phased in from the 2020/21 tax year, removed a landlord's ability to deduct mortgage interest from rental income before working out taxable profit. Instead, HMRC applies a flat 20% tax credit against whatever interest you've paid, regardless of your actual tax band. Under the old rules, interest came off your income before tax was calculated. Under the current rules, it doesn't: your taxable profit is calculated as if that interest were never paid, and only afterwards do you get a partial credit back.

Take a landlord with £14,400 in annual rent, £6,000 in mortgage interest and £1,800 in other allowable expenses. Under the old rules, taxable profit was £6,600 (£14,400 minus £6,000 minus £1,800). Under Section 24, taxable profit is £12,600: the interest simply isn't deducted, even though it's still a real cash cost coming out of the same bank account.

So if your rent and your mortgage payment haven't moved but your tax bill has, the calculator above is very likely showing you a genuine Section 24 effect rather than an error on your return.

How does the 20% tax credit actually work?

Once taxable profit is calculated without the interest deduction, HMRC applies tax at your normal rate, then subtracts a credit worth 20% of the interest you paid. That 20% figure is fixed: it doesn't rise with your tax band, which is the whole reason this hits some landlords far harder than others.

Worked example using this calculator's default figures (£14,400 rent, £6,000 interest, £1,800 expenses)

Basic-rate (20%): tax before credit £2,520, minus £1,200 credit = £1,320 net tax, identical to the old rules. Higher-rate (40%): tax before credit £5,040, minus £1,200 credit = £3,840 net tax, versus £2,640 under the old rules: an extra £1,200. Additional-rate (45%): tax before credit £5,670, minus £1,200 credit = £4,470 net tax, versus £2,970 under the old rules: an extra £1,500.

The maths points toward Section 24 being close to neutral if you're a basic-rate taxpayer, but a genuine and growing cost if you're higher or additional-rate. Your own numbers in the calculator matter more than any general rule of thumb.

Why does this hit higher-rate and additional-rate landlords hardest?

Under the old rules, a higher-rate taxpayer got relief on mortgage interest at their full 40% rate. Under Section 24 they still pay interest as a real cost, but the credit against it is capped at 20%, so they're effectively losing relief on 20 percentage points of every pound of interest they pay. An additional-rate taxpayer loses relief on 25 percentage points. A basic-rate taxpayer, by contrast, was only ever entitled to 20% relief anyway, so the flat credit roughly replaces what they had before.

This is why two landlords with identical portfolios and identical mortgages can see very different outcomes from the same policy, purely because of which tax band they sit in.

If you're a higher or additional-rate taxpayer with a large interest-only balance relative to your rent, Section 24 is a structural, recurring cost in your accounts that scales with how leveraged your portfolio is.

What is "phantom income" and can it push me into a higher tax band?

This is the part most landlords miss. Because Section 24 doesn't deduct interest before calculating taxable profit, the figure HMRC uses to work out which tax band you're in is inflated, sometimes close to double your actual cash profit. In the worked example above, real cash profit after interest and expenses is £6,600, but the taxable profit HMRC sees is £12,600. If a landlord's other income sits near the basic-to-higher-rate threshold, that inflated figure can tip them into the higher band on paper, triggering a bigger tax bill, even though not a single extra pound has landed in their bank account.

If your portfolio is heavily mortgaged relative to your rental income, check your tax band using the Section 24 taxable profit figure, not your cash profit. The two can tell very different stories, and only one of them is what HMRC actually taxes.

What this means for you

If the calculator above shows a meaningful gap between the old-rules figure and your current Section 24 bill, you're not alone. It's the direct, intended effect of the policy on leveraged, higher-rate landlords. Running the numbers through a buy-to-let yield calculator alongside this one gives you a fuller picture: a property can still look fine on gross yield while Section 24 is quietly eating a large slice of the net return.

Most landlords who run these numbers and find themselves consistently in the higher or additional-rate bracket end up researching whether holding future purchases through a limited company makes sense, since mortgage interest remains a normal deductible business expense for companies rather than being restricted under Section 24. It's a decision with real trade-offs: corporation tax, dividend tax on any money you draw out, lender criteria, and potentially Stamp Duty Land Tax on transferring existing properties in, which you can check with our Stamp Duty calculator. It's not a step to take from a single online calculator. But if you're in this position, it's a conversation worth having with an accountant who specialises in property, armed with the actual figures this tool has just shown you.