Mortgage interest restriction for landlords

If you are an individual landlord with a buy-to-let mortgage, you can no longer take your mortgage interest off your rental income before tax. Tax relief for finance costs for individual landlords of residential properties is fully restricted to the basic rate only¹. Instead of a deduction, you get a tax credit worth 20% of the mortgage interest you paid².

The restriction was phased in over four years from 2017⁴. It replaced the old system, under which landlords could deduct mortgage interest in full, with a mortgage interest tax relief at 20%⁴. Around a fifth of individual landlords have been affected by these income tax changes⁴.

The practical effect is that your rental profit is taxed at your income tax rate, which could be 20%, 40% or 45%, while the relief on your mortgage interest is capped at 20%⁵. If you pay tax at 40% or 45%, you pay more than you did before the change. The sections below explain how the restriction works, who it hits hardest, what you can still claim, and what happens if your rental income pushes you into a higher band or over the £100,000 Personal Allowance limit.

How the mortgage interest restriction works for individual landlords

Before the change, a landlord could deduct mortgage interest and other finance costs from rental income, reducing the profit on which tax was calculated. The restriction removed that deduction for individual landlords of residential property. Tax relief for finance costs for individual landlords of residential properties is fully restricted to the basic rate only¹.

Instead, you work out your taxable rental profit without deducting mortgage interest. You then calculate your tax on that profit at your marginal rate. Separately, you claim a tax credit worth 20% of the mortgage interest you paid². The credit reduces your tax bill, not your taxable income.

This distinction matters. A deduction reduces the profit that is taxed. A credit reduces the tax itself. If your rental profit is taxed at 40%, a deduction would have saved you 40% of the interest. The credit saves you 20%. The difference is the extra tax you pay.

The restriction applies to individual landlords. It does not apply to companies that own rental property, which are taxed differently. The tax relief that buy to let landlords are entitled to claim on their mortgage interest is the subject of section 24 of the Finance (No.2) Act 2015⁸.

The rate of mortgage interest tax relief is being increased to 22% in line with the new basic rental income rate from 6 April 2027⁹. Until then, the credit remains at 20%.

Rental profit is taxed at your income tax rate: 20%, 40% or 45%

Rental income is not taxed separately. It is added to your other income, including your salary, and taxed as part of your total income¹⁰. Income includes wages, benefits, money you make from working for yourself, and money you make from renting out a property¹¹.

For 2026/2027, the basic rate of 20% applies to income from £12,571 to £50,270. The higher rate of 40% applies to income from £50,271 to £125,140. The additional rate of 45% applies to income above £125,140⁵. The Personal Allowance is £12,570⁵.

If your salary alone uses up the basic rate band, your rental profit is taxed at 40% or 45%. The mortgage interest credit is still only 20%¹. This is why higher-rate and additional-rate landlords feel the restriction most.

The credit is based on 20% of your mortgage interest payments². You can also claim a tax credit based on 20% of your mortgage interest payments³. Now all landlords receive the same tax credit worth 20% of the amount of their mortgage interest¹².

Higher-rate and additional-rate landlords feel it most

The restriction bites hardest when your total income puts you in the higher or additional rate. A landlord whose salary already exceeds £50,270 pays 40% on rental profit but gets only 20% relief on mortgage interest⁵. The gap is 20 percentage points of the interest.

Independent analysis projects that the proportion of mortgaged landlords making a post-tax loss on their rental income will nearly double, from 11.2% to 20.3% by 2030 under current tax arrangements¹³. Under a scenario of tax reform plus rent control, the proportion of mortgaged landlords making a loss would increase slightly by 2030 compared to a scenario of tax reform alone, from roughly 13% to 17.3%¹³.

Mortgagors would pay a lower proportion of gross rental income on tax compared to under the current tax arrangements, around 18%, down from 22% by 2030¹³. These are projections, not current figures, and depend on assumptions about rents, costs and tax policy.

Awareness of related property tax rules is low. In a survey of 92 landlords, the majority of respondents (66%) stated that they were not aware of the relief, while the remaining 10% were unsure. Only 24% (22 out of 92) answered yes when asked about prior awareness¹⁴. This suggests many landlords may not fully understand how the restriction affects them.

Some lenders add an extra percentage on to the mortgage interest rate for allowing you to rent out the property¹⁵. If you rent out your home with your lender's permission, this surcharge increases your interest cost, and therefore the amount on which you can claim the 20% credit¹⁶.

Allowances that still reduce tax on rental income

The mortgage interest credit is not the only relief available. Several allowances and schemes can reduce the tax you pay on rental income or help with housing costs.

The property allowance lets you deduct a flat amount from rental income instead of claiming actual expenses. It is separate from the mortgage interest credit. If you claim the credit, you are using the finance cost rules, not the property allowance. The two are not interchangeable.

Income Tax reliefs can reduce the tax you pay if you qualify for them¹⁰. The amount of tax you pay can also be reduced by tax reliefs if you qualify for them¹⁰.

For landlords who are also tenants or homeowners on a low income, other support may be available. Renters or home owners on a low income might still be entitled to Housing Benefit, Rate Relief or both to help pay housing costs¹⁷. If you are entitled to other allowance schemes for rates, such as Disabled Person's Allowance (DPA) or Lone Pensioner's Allowance (LPA), this does not affect your entitlement¹⁸.

Homeowners on certain benefits may be able to get help towards mortgage interest payments called Support for Mortgage Interest¹⁹. If you rent your home, you cannot get help with housing costs this way²⁰. You can still get financial help with your housing costs if your income-related Employment and Support Allowance is stopping because you return to work full-time, work more hours, or earn more money²¹.

Is rental income taxed before or after my salary?

Rental income is added to your other income and taxed as part of your total income¹⁰. It is not taxed separately or after your salary in the sense of being ring-fenced. Your salary, any self-employed profits, savings interest above your allowance, and rental income all stack up.

This means rental profit can push you into a higher tax band. The higher rate of 40% applies to income from £50,271 to £125,140⁵. The mortgage interest credit remains at 20%¹.

Income Tax is payable on income above your Personal Allowance²². You have to pay tax on your income if you come to live, work or study in the UK¹¹. Income includes wages, benefits, money you make from working for yourself, and money you make from renting out a property¹¹.

You also pay Income Tax on any profit you earn from an inheritance, for example dividends on shares or rental income from a property²³. If you inherit a property and rent it out, the rental income is taxable in the same way as other rental income.

The order in which income is taxed matters for savings and dividends, but rental income is treated as part of your general income. It is not subject to a separate rate or order.

Can rental income push me over the £100,000 personal allowance limit?

Yes. The Personal Allowance reduces where income is above £100,000, by £1 for every £2 of income above the £100,000 limit, irrespective of date of birth⁶. The income limit for Personal Allowance is £100,000⁶.

Rental profit counts towards your total income, so it can take you over the £100,000 income limit at which the Personal Allowance starts to reduce. Above that limit the allowance reduces by £1 for every £2 of income above it, irrespective of date of birth⁶. This increases the tax you pay on all your income, not just the rental profit.

The effective tax rate on income between £100,000 and £125,140 can be higher than 40% because of the allowance taper. Each £2 of income above £100,000 reduces the allowance by £1, which means more of your income is taxed at 40%⁶.

Rental income counts towards the £100,000 threshold. If you are close to the limit, a modest rental profit can trigger a disproportionate tax increase. This is separate from the mortgage interest restriction but interacts with it, because the restriction increases your taxable rental profit.

Do Scottish and Welsh landlords pay different rates on rental profit?

Schedule 2 of the Finance Act 2026 makes provision for Scottish and Welsh property rates to be set by the Scottish Parliament and Senedd Cymru²⁴. This means the rates applied to rental profit may differ between Scotland, Wales and the rest of the UK.

The tax relief landlords of residential properties get for finance costs is at the rate of 20%. It is the same for residential landlords across the UK²⁵. So the relief rate is uniform, but the income tax rates applied to rental profit may vary.

Community landlords usually increase rent in line with the rent setting formula set by the Welsh Government²⁶. In Scotland, Wales and Northern Ireland, rent increase bodies could set rent higher, so it is worth weighing this up before agreeing to a rent increase²⁷.

For landlords operating in Scotland or Wales, the interaction between the 20% finance cost relief and the devolved income tax rates determines the overall tax position. The relief does not vary by nation, but the tax on profit may.

Will I need to use Making Tax Digital for my rental income?

From 6 April 2026 onwards, HMRC is introducing a requirement for some sole traders and individual landlords to use Making Tax Digital for Income Tax⁷. From April 2026, landlords and sole traders earning over £50,000 a year before tax and expenses will need to comply¹⁵.

From April 2028, the threshold reduces to £20,000. Those with gross income above £20,000 on their 2026/27 tax return must use Making Tax Digital from April 2028 unless exempt⁷. Individuals with self-employment and/or property income over £20,000 will have to join MTD from April 2028⁷.

Making Tax Digital means keeping digital records and sending quarterly updates to HMRC. If you are a landlord with rental income above the threshold, you will need to use compatible software and follow the MTD rules.

If your qualifying income is below the threshold, you are not required to join at that point. The threshold is based on gross income before tax and expenses, not profit¹⁵.

Where to get help

If you are struggling with tax on rental income or mortgage payments, free and impartial help is available. MoneyHelper provides guidance on rent arrears and problems paying rent²⁸. Business Debtline offers guides on income tax debt⁷ and negative equity²⁹. National Debtline has information on negative equity³⁰.

For mortgage payment difficulties, lenders may reduce your payments for a set period, charge interest only for a while on a repayment mortgage, give a payment holiday, or extend the mortgage term to reduce payments, depending on your payment history and whether difficulties are long or short term¹⁹.

If you are a leaseholder in a building affected by safety issues, you may face potential difficulty remortgaging, moving, or buying additional shares in your home because of reduced lender appetite to provide mortgage finance against flats in affected buildings³¹.

Some lenders will only lend on an interest-only basis to high-net-worth individuals with incomes of £100,000 or more³³. Retirement interest-only mortgages are restricted to older customers above a specified age³⁴.

For Housing Benefit claimants above the qualifying age for Pension Credit, the £10,000 lower capital limit also applies³⁵. If you rent from a private landlord, your benefit is usually restricted by the Local Housing Allowance rates³⁶.

Terms in mortgage agreements or insurance which prevent landlords renting to people who get benefits are no longer permitted³⁷. Landlords can usually deduct money from a security deposit to cover unpaid rent, damage to the property, missing items, and cleaning costs²⁶.