Most landlords assume rental income is taxed in full: collect £14,400 a year, pay tax on £14,400. It isn’t. Before the tax is worked out, HMRC lets you deduct almost every running cost of the property — so you’re taxed on the profit, not the rent.
But one big change caught a lot of landlords out and is still misunderstood: mortgage interest is no longer a deductible expense. Since April 2020, Section 24 replaced that deduction with a 20 % tax credit — and for higher-rate taxpayers that quietly raised the bill, sometimes a lot.
General information, not tax advice. The figures are illustrative examples; your own position depends on your tax band, whether you hold the property personally or through a company, and your mortgage. Check with an accountant before filing. The rules are set out on gov.uk — Renting out a property and in HMRC’s Property Income Manual.
If you’re still deciding whether to buy, the rental yield calculator gives you the pre-tax number in a minute. This article is the next step: what you can subtract from the taxman once the property is let.
The reference property
Same flat we use in The 7 hidden costs, so the numbers line up:
- Purchase price: £250,000
- Rent: £1,200/month → £14,400/year gross
- Held personally (not through a limited company — that changes everything, see below)
What you can deduct
For property let personally, HMRC allows you to deduct expenses that are wholly and exclusively for the letting, including:
| Allowable expense | In the example |
|---|---|
| Letting agent / management fees | £1,440 |
| Repairs and maintenance (not improvements) | £950 |
| Landlord insurance | £300 |
| Ground rent and service charges | £1,800 |
| Council tax / utilities (if you pay them) | 0 |
| Accountant fees, advertising, phone, admin | £250 |
| Replacement of domestic items (see below) | as incurred |
Two things that trip people up:
- The £1,000 property allowance: if your total rental income is under £1,000 you don’t even declare it. Above that, you claim actual expenses instead — you can’t have both.
- The old 10 % “wear and tear” allowance was abolished in 2016. You now claim the actual cost of replacing a domestic item (the broken washing machine, the worn sofa) — but not the first one you buy, and not an upgrade beyond a like-for-like replacement.
Section 24: mortgage interest is now a credit, not a deduction
This is the big one. Until 2017 you deducted all your mortgage interest as an expense. It was phased out between 2017 and 2020, and since April 2020 you get instead a tax credit worth 20 % of the interest.
Why it matters: your rental income is now counted gross of interest when working out your total income. That can:
- push a basic-rate landlord into the higher-rate band, and
- for a higher-rate (40 %) taxpayer, mean you effectively only get relief at 20 % on interest you’re actually paying at full whack.
This is exactly why our real-vs-projected post warns that the spreadsheet drifts — Section 24 alone can move a leveraged landlord from profit to loss on paper.
Repairs yes, improvements no (the distinction HMRC cares about most)
- Repairs and maintenance — repainting, fixing the boiler, replacing a broken tap, like-for-like replacement of a knackered appliance: deductible in the same year.
- Improvements — a new extension, a first-time fitted kitchen where there wasn’t one, an upgrade well beyond the original: not an expense. It’s capital, and it reduces your Capital Gains Tax when you eventually sell instead.
The test is roughly: “are you restoring it to its previous state, or adding something that wasn’t there?” Repainting after a tenant is a repair; converting the loft is an improvement.
The example, start to finish
Higher-rate (40 %) landlord, with an interest-only mortgage of £2,400/year interest on the £250,000 flat:
| Item | Amount |
|---|---|
| Rent (£1,200 × 12) | +£14,400 |
| Letting / management (10 %) | −£1,440 |
| Service charge | −£1,800 |
| Insurance | −£300 |
| Repairs | −£950 |
| Accountant / admin | −£250 |
| Taxable rental profit (interest NOT deducted) | £9,660 |
| Tax at 40 % | −£3,864 |
| Section 24 credit (20 % × £2,400 interest) | +£480 |
| Tax due | £3,384 |
Note what Section 24 does: the £2,400 of interest you actually pay only gives you £480 back. Before 2017 you’d have deducted the full £2,400 at 40 %, saving £960 — so the change costs this landlord £480 a year on the same mortgage.
A basic-rate (20 %) landlord on the same numbers pays 20 % of £9,660 = £1,932, then the £480 credit → £1,452 — provided the gross rental profit doesn’t tip them into the higher band, which is the trap Section 24 sets.
What you can’t deduct
- Mortgage capital repayment (and, since 2020, interest is a credit, not a deduction).
- Improvements in the year they’re done (they reduce CGT on sale instead).
- Personal costs, or costs for periods the property wasn’t let or available to let.
- Your own time.
What matters
You’re not taxed on the rent you collect — you’re taxed on the profit after allowable expenses, and for most landlords that’s well below the headline rent. The two things that decide whether you overpay are keeping every allowable expense recorded, and understanding that since Section 24 your mortgage interest is a 20 % credit, not a deduction — the single change most likely to make your real return lower than the spreadsheet’s.
If you’d rather have each allowable expense categorised per property all year — and reach the January deadline with the breakdown already done instead of rebuilding it from memory — take a look at Livra.