What your mortgage interest is actually worth: the finance cost restriction and the April 2027 property rates
Most landlords still think of mortgage interest as an expense. It has not been one since April 2020, and the difference shows up in places nothing to do with the rental accounts, from the personal allowance taper to Tax-Free Childcare. Here is how the basic-rate credit is really calculated, what it costs you elsewhere, and precisely what the Autumn Budget 2025 property rates do from 6 April 2027.
Start with the wedge, not the mortgage statement
A landlord looking at GBP 12,000 of mortgage interest reasonably assumes it takes GBP 12,000 off taxable profit. Since April 2020 it has done nothing of the kind. Interest and other finance costs on residential letting are not deducted in arriving at the profit of the property business at all. They buy a credit against the final tax bill instead, given at the basic rate. What that produces is a wedge: the rental profit is taxed at your marginal rate, while the borrowing that produced it is relieved at 20 per cent. For a higher-rate taxpayer the wedge is 20 percentage points. For an additional-rate taxpayer it is 25. Almost everything that follows, including the April 2027 surprise, is a consequence of that one arithmetic fact.
How the credit is actually calculated
HMRC's Property Income Manual sets the mechanics out at PIM2058, and they matter because the credit is not simply 20 per cent of your interest. The reduction is the basic rate applied to the lowest of three figures: the relievable finance costs for the year plus any unrelieved amount brought forward; the profits of the property business for the year, after using any brought-forward property losses; and adjusted total income, which is your income after losses and reliefs, with savings and dividend income stripped out and the personal allowance deducted. It applies to individuals, individuals in partnership, trustees of accumulation or discretionary trusts and personal representatives, but not to companies and not to commercial letting. Since 6 April 2025 it does apply to furnished holiday lets, which lost their exclusion when that regime was abolished. Where a loan funds both residential and commercial property, the interest must be apportioned on a just and reasonable basis, and HMRC's stated preference at PIM2056 is apportionment by original cost including improvements rather than by current valuation.
The number that does the quiet damage
Because finance costs never reduce the property profit, they never reduce your total income either, and total income is the raw material for adjusted net income. That is the measure HMRC uses for three separate cliffs. Above GBP 100,000 the personal allowance is withdrawn by GBP 1 for every GBP 2 of income, exhausted at GBP 125,140, which produces the familiar 60 per cent effective band. The High Income Child Benefit Charge begins once adjusted net income exceeds GBP 60,000, clawing back 1 per cent of Child Benefit for every GBP 200 above it, and takes the whole entitlement at GBP 80,000. Tax-Free Childcare is harsher still: if you or your partner expects adjusted net income over GBP 100,000, eligibility goes entirely, and with it up to GBP 2,000 per child per year, or GBP 4,000 for a disabled child. A geared landlord with unremarkable cash flow can be pushed over all three lines by income that never reached their bank account.
An illustrative case
Illustrative figures only, for an England, Wales or Northern Ireland taxpayer with no income beyond that stated; this is general information, not advice on your own affairs. Take a landlord in 2026/27 with employment income of GBP 62,000, rents of GBP 30,000, non-finance expenses of GBP 6,000 and mortgage interest of GBP 12,000. Property profit for tax is GBP 24,000, because the interest is left out. Total income is GBP 86,000, taxable income GBP 73,430 after the personal allowance, and the tax before any credit is GBP 21,832. The finance cost reducer is 20 per cent of the lowest of GBP 12,000, GBP 24,000 and GBP 73,430, so GBP 2,400, leaving GBP 19,432. Had the interest been a straightforward deduction, the bill would have been GBP 17,032. The restriction costs GBP 2,400, exactly as the 20-point wedge predicts. The second consequence is larger and less visible: adjusted net income of GBP 86,000 sits above GBP 80,000, so all Child Benefit is clawed back, whereas a deduction would have left adjusted net income at GBP 74,000 and a charge of 70 per cent.
When the credit is capped, and where the rest goes
If the lowest of the three figures is your property profits or your adjusted total income rather than the finance costs, the balance is not lost: it carries forward and is added to the following year's relievable amount. HMRC's own worked example runs a landlord with GBP 15,000 of finance costs against property profits of GBP 13,000, so relief is given on GBP 13,000 and GBP 2,000 rolls into the next year, joining that year's costs. This pool lives nowhere except the working papers and the return, so it tends to vanish on a change of accountant or software. If you have ever had a loss-making or low-profit year while carrying substantial borrowing, ask specifically whether a brought-forward pool exists and is still tracked.
What the Autumn Budget 2025 did, and what it did not
From 6 April 2027 property income gets its own rates, now on the statute book at sections 6 and 7 of the Finance Act 2026: a property basic rate of 22 per cent, a property higher rate of 42 per cent and a property additional rate of 47 per cent, each two points above the corresponding main rate. These apply to England, Wales and Northern Ireland; the government says it will engage with the devolved governments of Scotland and Wales about powers to set property income rates. Property income will be taxed after employment, trading and other income but before savings and dividend income, and the personal allowance comes off non-property income first. The point most commentary misses is in the technical note: relief for residential finance costs continues in exactly the same way, but from 2027/28 it is given at the property basic rate. Twenty-two per cent, not twenty. So the wedge does not widen. Forty-two less twenty-two is still twenty points; forty-seven less twenty-two is still twenty-five. April 2027 is not a Section 24 change at all. It is a rate rise on the profit that Section 24 already inflated. Run the illustrative landlord through 2027/28 on identical figures and the bill is GBP 19,672 against GBP 19,432, some GBP 240 more, being two points on GBP 24,000 of profit less two points on GBP 12,000 of interest. Note too that the personal allowance stays at GBP 12,570 and the basic rate limit at GBP 37,700 through to the 2030/31 tax year, so for many landlords frozen thresholds will move more money than the new rates.
What to do in the months you still have
Four things, in order. First, recalculate your adjusted net income the way HMRC does, with the interest added back, and see how close you sit to GBP 60,000, GBP 80,000 and GBP 100,000; that distance, not your rental yield, is where the real money is. Second, if you are near a cliff, look at the reliefs that genuinely reduce adjusted net income, principally grossed-up personal pension contributions and Gift Aid donations, and model them before the tax year closes. Third, locate any pool of unrelieved finance costs and make sure it is recorded, because from 2027/28 relief on it is given at 22 per cent. Fourth, check your Making Tax Digital position: if your qualifying income from self-employment and property for 2025/26 is over GBP 30,000, you join quarterly reporting from 6 April 2027. HMRC decides that from your 2025/26 return, due online by 31 January 2027, so the return you file this coming January sets your compliance regime for the year the new rates begin. Resist the urge to incorporate on the strength of a two-point rate change; the stamp duty, capital gains and refinancing consequences will usually dwarf it.
The questions worth putting to your accountant
Ask five things, before the tax year ends rather than in the following January. Do I have unrelieved finance costs brought forward, and what is the figure? Is my adjusted net income within GBP 5,000 of any of the three cliffs, and what pension contribution would clear it? If I hold mixed residential and commercial property, on what basis has the interest been apportioned? What is my 2027/28 liability on this year's figures at the new property rates, so I can budget rather than be surprised? And if incorporation keeps coming up, what is the full entry cost, including stamp duty land tax and any capital gain, set against the annual saving? An adviser who can answer all five in one sitting is worth keeping.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.