UK Landlord Tax Credits: The 22% Mortgage Interest Dilemma Explained
- MAZ
- 2 days ago
- 11 min read
Understanding the Big Change: From Full Deductions to a 20% Tax Credit
Before April 2017, things felt simpler. You could subtract your full mortgage interest (and similar finance costs) straight from your rental income before working out your taxable profit. It was a fair reflection of the real costs you faced. But the government phased in restrictions under what’s often called Section 24, fully in place by the 2020/21 tax year. Now, for most individual landlords letting residential properties, you no longer deduct mortgage interest from your rental profits. Instead, you calculate your profit without subtracting those finance costs, pay tax on that higher figure, and then receive a tax credit of 20% on the qualifying finance costs, deducted from your final tax bill.
The reason? The aim was to make the playing field fairer between landlords and would-be first-time buyers, as generous deductions were seen to push up house prices. Whether you agree or not, this is the current reality for the 2025/26 tax year (and no major reversal is on the horizon). The rules apply to UK resident individuals and partnerships letting residential properties – but not usually to limited companies or commercial lets. For the latest official wording, check the HMRC guidance on changes to tax relief for residential landlords.
Why the 20% Credit Creates a Real Dilemma for Many Landlords
Here's where it gets frustrating. That 20% credit matches the basic rate of income tax, so if you're a basic-rate taxpayer, you end up roughly where you were before – no big loss. But if you're a higher-rate (40%) or additional-rate (45%) taxpayer, the credit only covers part of the tax you're paying on the interest amount. Effectively, you're taxed at your marginal rate on money that's going straight to your lender.
I've seen this hit clients hard. Imagine your rental income pushes your total earnings into the higher band, or even makes you lose part of your personal allowance if you're over £100,000. Suddenly, more of your salary or other income gets taxed at a higher rate too. It's not just an extra bill on the property – it can ripple through your whole finances. And since the Furnished Holiday Let special regime ended from April 2025, even those previously favoured holiday properties now face the same 20% credit restriction.
Crunching the Numbers: Clear Examples for the 2025/26 Tax Year
Let’s make this concrete with two realistic scenarios for the current tax year (6 April 2025 to 5 April 2026). Tax bands are frozen for now: basic rate up to £50,270 of taxable income, higher rate 40% above that, additional rate 45% over £125,140.
Basic-rate example:
You have £15,000 rental income, £3,000 other allowable expenses (repairs, insurance, etc.), and £4,000 mortgage interest.
Profit before interest: £12,000. Tax at 20%: £2,400.
Then subtract the 20% credit: £800.
Net tax on rental income: £1,600 – same outcome as the old rules.
Higher-rate example:
Rental income £30,000, expenses £5,000, interest £12,000. Other income £60,000 (so higher rate).
Profit before interest: £25,000. Tax at 40%: £10,000.
Credit: 20% of £12,000 = £2,400.
Net tax: £7,600.
Under old rules? Deduct interest first: £13,000 profit at 40% = £5,200. You're £2,400 worse off now.
These gaps grow if you're additional-rate or if interest is very high. Use HMRC's own property income calculator to plug in your figures – it's free and surprisingly straightforward.
Who Gets Hit Hardest – and Common Questions I Hear Every Day
The dilemma bites deepest for higher-rate taxpayers with large mortgages relative to rental income – think leveraged portfolios in expensive areas. A common worry: “Will this push me into a higher band?” Yes, it can, because adding back the interest inflates your taxable rental profit. Another frequent question: “What about mixed-use properties?” You may apportion – full deduction for the commercial part, 20% credit for residential. And if you're in a partnership or trust, the rules can get trickier – always check the HMRC Property Manual.
One more: unused finance costs. If your tax bill is zero (or low) in a year, you can't use the full 20% credit, but you can carry forward the unused amount to offset future tax. Declare it properly on your return to avoid losing it.
Practical Ways to Ease the Pain Without Panic
Good news – you have options. Many landlords I've advised have softened the blow without selling up.
● Consider incorporating into a limited company: Companies deduct finance costs fully against corporation tax (19–25% depending on profits). But factor in stamp duty land tax on transfer, potential CGT, and higher mortgage rates.
● Remortgage to interest-only to lower the interest figure.
● Shift ownership to a lower-rate spouse or civil partner (via a formal declaration – no immediate tax if no gain).
● Maximise other deductions: repairs, agent fees, insurance, mileage (45p per mile first 10,000), professional fees. Keep receipts!
● If you're near thresholds, time income or expenses carefully.
Quick checklist before your next return:
Gather mortgage statements, expense records, and P60s.
Register for self-assessment if rental income exceeds £1,000.
File online by 31 January 2027 for 2025/26 (paper earlier).
Consider the £1,000 property allowance if your gross rent is modest.
Staying on Top of Reliable Advice in a Changing Landscape
With blogs and forums full of outdated info, stick to trusted sources. HMRC's pages on rental income and finance cost relief are gold – regularly updated. Google's emphasis on people-first content (experience, expertise, authority, trustworthiness – E-E-A-T) helps too: look for articles with real examples, official links, and current-year details, not hype or old rules. Around 2.5 million landlords face this restriction, and higher-rate ones often see an extra £1,000–£2,000 tax annually, based on industry estimates.
Taking Control: Your Next Steps for a Smoother Tax Journey
We've unpacked the change, the maths, the pitfalls, and the practical fixes. The 20% credit isn't going away soon, but with careful planning you can protect your returns and keep your properties worthwhile investments.
Review your last return now – it might reveal quick wins for the current year. If your setup is complex (multiple properties, company thoughts, or high income), talk to a qualified accountant early. I've watched clients turn frustration into strategy time and again. You've got the knowledge now – use it, stay organised, and here's to more profitable years ahead. If something still niggles, feel free to ask – I'm always happy to clarify. Keep going!
Navigating Reliable Info in a Sea of Online Advice
With so much out there on landlord taxes, how do you know what's trustworthy? I've learned over the years that not all sources are equal—some blogs recycle old info, leading to costly mistakes. That's where Google's guidelines come in handy for spotting quality content. Their 2025 core updates emphasise "people-first content," meaning articles written to genuinely help readers like you, not just game search rankings. Look for pieces showing experience, expertise, authority, and trustworthiness (E-E-A-T)—things like real examples, citations to official sites, and updates for the latest tax year.
For instance, avoid sensational headlines promising "tax hacks" without caveats; instead, prioritise GOV.UK or established firms. In my writing, I always aim for that people-first approach—focusing on your needs, like clarifying this 20% rule without overwhelming you. It builds trust, and honestly, it's why clients stick with me.
Recent stats? As of 2025, around 2.5 million UK landlords are affected by this restriction, with higher-rate ones facing an average £1,200 extra annual tax, per industry reports. If you're one of them, you're not alone.
Wrapping Up: Take Control of Your Landlord Taxes
We've covered a lot—from the origins of the 20% credit to practical fixes and how to spot solid advice. The key takeaway? This "dilemma" doesn't have to derail your plans; with smart planning, you can minimise its impact and keep your investments thriving.
If your situation feels complex—maybe multiple properties or cross-border elements—chat with a qualified accountant sooner rather than later. I've seen too many wait until deadline panic sets in. Start by reviewing your 2024/25 return now; it could highlight savings for next year. You've got this—landlording is rewarding when the taxes align. Drop me a line if you have questions, or head to HMRC for personalised tools. Here's to smoother tax seasons ahead!
FAQs
Q1: Does the mortgage interest tax credit apply differently if I'm a Scottish landlord?
A1: Well, it's worth noting that while the 20% tax credit mechanism itself is the same across the UK, Scottish landlords face a twist because income tax rates north of the border are set by the Scottish Parliament. In my experience advising clients in Edinburgh, if you're a higher-rate payer there—where bands start at 41% for incomes over £43,662—you're effectively getting less relief relative to your tax rate, making the dilemma even sharper. Consider a freelancer in Glasgow with £15,000 in rental income and £8,000 interest: they'd tax the full profit at Scottish rates but only get the UK-wide 20% credit, potentially adding £800 more to their bill than an English counterpart. Always factor in Scottish thresholds when planning.
Q2: What happens if I have multiple buy-to-let properties—does the credit calculation change?
A2: In practice, I've seen this trip up many portfolio landlords who assume it's per property, but actually, the 20% credit is aggregated across your entire residential letting business. For instance, one client with three flats in Manchester had varying interest costs; we pooled them all, deducted allowable expenses first, then applied the credit to the total finance costs. The pitfall? If losses from one property offset profits in another, it can limit your credit—say, if total profits are £20,000 but interest £25,000, you're capped at 20% of £20,000. Carry forward the excess, but review annually to avoid underclaiming.
Q3: How does joint ownership with a spouse affect the mortgage interest tax credit?
A3: Ah, joint ownership can be a smart move for couples, especially if one is in a lower tax band. From helping pairs in my practice, the credit is calculated individually based on your share of the interest—typically 50/50 unless declared otherwise via Form 17. Picture a scenario where you're higher-rate and your partner basic-rate: shifting more beneficial interest to them (with HMRC approval) lets them claim full effective relief, potentially saving £1,500 on £10,000 shared interest. But beware, this affects capital gains too, so get it documented early.
Q4: Can unused mortgage interest costs be carried forward to future years?
A4: Absolutely, and this has saved several of my clients from nasty surprises in lean years. If your tax liability is low—maybe due to high expenses or low rent—you can't use the full 20% credit, but the unused portion rolls over. Take a semi-retired landlord I advised whose first-year profits were just £5,000 against £12,000 interest: only £1,000 credit used, with £1,400 carried forward. It offset the next year's bill nicely, but track it meticulously on your SA105 form to prevent audits.
Q5: What about furnished holiday lets—do they still get full mortgage interest deductions?
A5: Not anymore, and this change hit hard for coastal property owners I've worked with. Since April 2025, FHLs lost their special status and now fall under the standard 20% credit rule, aligning them with regular residentials. A Devon holiday let owner in my books saw her tax jump £900 on £6,000 interest because she could no longer deduct fully. If yours qualifies for averaging or pooling, check that first, but pivot to maximising other claims like capital allowances.
Q6: How does the tax credit work for UK landlords with overseas rental properties?
A6: It's broadly similar, but with extra layers that often confuse expat clients. The 20% credit applies to foreign residential lets if you're UK tax resident, but you must report worldwide income. One pitfall I've encountered: double taxation agreements might allow foreign tax credits, but mortgage interest isn't always offsettable abroad. For example, a landlord with a Spanish villa paying £7,000 interest might get the UK 20% relief, but if Spain taxes it differently, claim relief via your return—always use the foreign pages on self-assessment to avoid overpaying.
Q7: If I'm self-employed, how does rental income interact with my business taxes regarding this credit?
A7: This is a common overlap for sole traders with side rentals, and in my experience, it requires careful separation. Your rental is treated as a separate property business, so the 20% credit applies only to letting finance costs—not your trading loans. Imagine a plumber in Leeds with £10,000 shop loan interest (fully deductible) and £5,000 BTL mortgage: the latter gets the credit after aggregating incomes, potentially pushing you into higher bands. Offset by timing business expenses, but declare distinctly to steer clear of HMRC queries.
Q8: What if my main income is from a pension—does that change the mortgage interest dilemma?
A8: Pensions add a wrinkle, as I've seen with retired clients relying on rentals for top-ups. The credit still applies, but if your total (pension + rental) exceeds £100,000, you risk tapering your personal allowance, amplifying the hit. A pensioner I advised with £40,000 annuity and £15,000 rent plus £8,000 interest ended up paying 60% effective tax on part due to the add-back. Mitigate by drawing pension flexibly or using carry-forward to smooth it out.
Q9: How can I avoid being pushed into a higher tax band because of the interest add-back?
A9: It's frustrating when phantom profits from interest inflate your band, but strategies exist based on cases I've handled. Boost pension contributions to reduce taxable income—say, paying £2,000 into a SIPP gets 20% relief upfront, potentially keeping you basic-rate. One high-earner landlord avoided the 40% trap by doing this, saving £1,200. Or, if married, transfer assets to a lower-band spouse; just ensure it's genuine and reported.
Q10: Does refinancing my buy-to-let mortgage impact the tax credit eligibility?
A10: Not directly, but the new loan terms can subtly affect it, as I've explained to remortgaging clients. The credit covers interest on loans for buying or improving the property, so refinancing qualifies if it's like-for-like. A trap: if you release equity for non-property use, that portion's interest might not qualify. For a £200,000 refinance with £10,000 equity out, apportion accurately—claim only 95% as deductible finance cost.
Q11: What if my property is mixed residential and commercial—how is the credit applied?
A11: Mixed-use is tricky but rewarding if handled right, from my work with shop-flat owners. Apportion interest based on floor space or value—say, 60% residential gets the 20% credit, while 40% commercial allows full deduction. A Birmingham retailer I advised saved £600 by splitting his £5,000 interest this way. Get a valuer's report for evidence, as HMRC often scrutinises these.
Q12: How does the tax credit differ for landlords in partnerships versus individuals?
A12: Partnerships follow similar rules, but the credit is allocated per partner based on profit shares, which I've used to optimise for unequal couples. Unlike individuals, losses can't always offset personally. Consider a 70/30 partnership where the higher-share partner is basic-rate: they get fuller benefit. A common mistake? Not adjusting for personal circumstances—always compute individually after partnership return.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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