Section 24 Phantom Income: UK Landlord Tax 2026

You pay the mortgage, the agent and the repairs, and there isn’t much left. Then the tax bill arrives as if there were. The cause is the mortgage interest rule (Section 24 of the Finance (No. 2) Act 2015), fully phased in by April 2020, and most UK landlords still underestimate its bite.

Mortgage interest is no longer deductible, so your taxable rental profit is now much higher than your cash profit. That can push you into the higher-rate band, taper the Personal Allowance above £100,000, and even trigger the High Income Child Benefit Charge. This is called phantom income. The more mortgage interest you pay, the bigger it gets.

This guide shows exactly how Section 24 inflates your taxable income, works through the numbers, then covers four legal ways to cut the bill, from least disruptive to most.

How Section 24 actually works

Pre-2017, landlords deducted mortgage interest from rent like any other expense. From April 2020 that relief was replaced by a 20% tax credit on mortgage interest. That is the rate for 2026–27. From 2027–28 property income is taxed at 22%, 42% and 47%, and the credit rises to 22%.

Taxable profit formula now:

Taxable profit = Rent − Allowable expenses (excluding mortgage interest)

Then at the tax calculation stage:

Tax = Taxable profit × marginal rate − 20% of the lowest of: mortgage interest, property profit, adjusted total income

For a basic-rate landlord this works out the same. For anyone above the basic-rate threshold (£50,270 total income in 2026), it always costs more tax than the old rules.

The gap between cash profit and taxable profit is easiest to see on your own figures. From £7.99 a month, LetCompliance records the rent and every cost against each property, mortgage interest included, and on paid plans its Section 24 calculator works out the tax on those figures. Get started

Worked example: the phantom income trap

Landlord Sarah earns £40,000 PAYE from a day job and owns one BTL:

• Rent: £18,000
• Mortgage interest: £9,500
• Other expenses (agent, insurance, repairs): £3,000

Under old rules (pre-2017)

Taxable rental profit = £18,000 − £9,500 − £3,000 = £5,500

Total income: £40,000 + £5,500 = £45,500 → basic rate

Tax on rental profit: £5,500 × 20% = £1,100

Under Section 24 (2026–27 rates)

Taxable rental profit = £18,000 − £3,000 = £15,000

Total income: £40,000 + £15,000 = £55,000 → £4,730 now in higher-rate band

Tax on rental profit: (£10,270 × 20%) + (£4,730 × 40%) = £2,054 + £1,892 = £3,946

Less 20% credit on mortgage interest: £9,500 × 20% = £1,900

Tax due: £2,046

Cash profit is the same both ways (£5,500). Tax bill nearly doubled, and Sarah's effective marginal rate on her job income has gone up too.

Phantom income side effects (the bit most guides miss)

Because Section 24 inflates your taxable income, it can also trigger:

1. 1Higher-rate band: rental "profit" pushes PAYE income over £50,270 (UK ex Scotland)
2. 2Personal Allowance taper: above £100,000 total income you lose £1 of PA for every £2 earned. That’s an effective 60% marginal rate
3. 3High Income Child Benefit Charge: taper starts at £60,000, full claw-back by £80,000 (2026 thresholds)
4. 4Student Loan Plan 2 repayments: 9% above £29,385 (2026–27)
5. 5Pension Annual Allowance taper: threshold income checks use taxable profit, not cash profit

A landlord can lose the whole Personal Allowance and all Child Benefit (through the charge) in the same year, while barely breaking even in cash.

Four legal ways to mitigate Section 24 in 2026

1. Transfer to your lower-earning spouse (Form 17)

If your spouse is in a lower tax band (or has no income), you can shift beneficial ownership via Form 17 and a declaration of trust. Best for jointly owned properties where you file as tenants-in-common.

• Stamp duty impact: usually nil if there's no consideration
• CGT impact: transfers between spouses are no gain / no loss
• Mortgage lender: must consent (many do, some refuse)

2. Switch to a limited company (SPV)

Inside a ltd co, mortgage interest is fully deductible before corporation tax (19–25% in 2026). Section 24 does not apply.

Trade-offs (covered in the SPV transfer guide):

• SDLT payable on market-value transfer (the 5% BTL surcharge from Oct 2024 bites)
• CGT on the gain since you bought it
• Higher mortgage rates (+0.3–0.7%)
• Corporation tax + dividend tax on profit extraction

Whether it pays off depends on your transfer costs and how long you hold, so run the numbers for your own portfolio.

3. Pension contributions (extend the basic-rate band)

Every £1 of pension contribution effectively extends your basic-rate band by £1. A higher-rate landlord making a £10,000 gross SIPP contribution (£8,000 paid in, plus £2,000 basic-rate relief added by the provider) pushes £10,000 of rental profit back into the 20% band, saving a further £2,000 in tax.

4. Overpay the BTL mortgage

Every £1,000 of mortgage reduction cuts interest by ~£50/year. Because you lose the 20% credit on that interest, the £50 saving is worth £40 after tax: an effective return of 4.0% (£39 and 3.9% from 2027–28, when the credit is 22%). Often beats equity funds for pure cash-flow landlords.

FAQs

Does Section 24 apply to furnished holiday lets (FHLs)?

FHLs lost their special tax treatment in April 2025, so Section 24 now applies to them as well.

Does Section 24 apply in Scotland?

Yes. Section 24 is UK-wide. Scottish Income Tax bands differ (starter 19%, intermediate 21%, higher 42% etc.) but the interest-relief restriction is identical.

Can I incorporate my portfolio without triggering CGT?

Only via Incorporation Relief (s162 TCGA), which requires you to run the portfolio as a genuine business (usually 20+ hrs/week, multiple properties, active management). Get specialist advice first: HMRC rejects weak claims.

Does Section 24 apply to limited companies?

No. Ltd co BTL deducts interest normally before corporation tax.

Where to go next

• Rental yield UK 2026: gross, net & after-tax: how Section 24 eats into your real yield
• SPV buy-to-let transfer costs: should you incorporate?
• Buy-to-let tax guide 2026: the full tax picture for landlords

First, see the number on your own figures: the free rental income tax calculator shows your tax after Section 24, no signup. Then Get started. LetCompliance keeps the money side of the let in one place as it happens: rent in the ledger, every deductible expense against its property, and profit and loss per property. From that you get a Section 24 calculator, an SA105-shaped tax pack and Making Tax Digital quarterly updates sent to HMRC (LetCompliance is recognised by HMRC). You or your accountant file the final return.