Section 24: how the 20% mortgage interest credit really works

Since the "Section 24" rules were fully phased in, individual landlords cannot deduct mortgage interest (or other finance costs) as an expense against rental income. Instead, you get a tax credit worth 20% of the interest — the basic rate — regardless of your own tax band. Getting this wrong is one of the most common and expensive mistakes in landlord tax returns.

The wrong way vs the right way

Say you collect £15,000 rent, pay £5,000 mortgage interest and £2,000 of other allowable costs:

• Wrong (old method): profit = £15,000 − £5,000 − £2,000 = £8,000 taxed.
• Right (Section 24): profit = £15,000 − £2,000 = £13,000 taxed, then subtract a credit of 20% × £5,000 = £1,000 off your tax bill.

For a basic-rate taxpayer the two methods often land in a similar place. For a higher-rate taxpayer they don't — relief that used to be worth 40% of the interest is now worth 20%, and the inflated "profit" figure can even push you into a higher band or over thresholds like the £50,270 line.

Common traps

• Recording interest as a normal expense in your software — this understates your taxable profit and misstates your MTD updates.
• Using the full mortgage payment — only the interest element qualifies, never the capital repayment.
• Forgetting the credit is capped — it can't reduce your tax below zero; unused credit carries forward.
• Companies are different — limited companies still deduct interest in full, which is one reason some landlords incorporate (a decision that needs proper advice).

What this means under MTD

Your quarterly updates must categorise finance costs separately from other expenses, so HMRC can apply the credit correctly at year end. Software that lumps mortgage interest in with repairs will produce wrong numbers all year. (MTDFox tracks finance costs as their own category and applies the 20% credit in its estimates automatically.)