How buy-to-let tax works
Working out rental profit, allowable expenses, the Section 24 mortgage-interest restriction, income tax bands and Capital Gains Tax on sale.
How landlords are taxed
As an individual landlord you pay Income Tax on your rental profit — the rent you receive minus your allowable running costs. That profit is added to your other income and taxed at your top rate: 20%, 40% or 45% (or the Scottish rates). The complication is how mortgage interest is treated.
Working out rental profit
Start with the rent, then deduct allowable expenses. The big distinction is running costs (deductible) versus capital and improvements (not):
| Usually deductible | Not deductible |
|---|---|
| Letting agent / management fees | Mortgage capital repayment |
| Landlord insurance | Mortgage interest (see Section 24) |
| Repairs & maintenance | Improvements / renovations |
| Ground rent & service charge | Your own time |
| Accountancy, replacing furnishings | The purchase price |
Section 24: the mortgage-interest trap
This is the rule that catches most landlords out. Since 2020/21, individual landlords can no longer deduct mortgage interest from rental profit. Instead, the interest is replaced by a 20% basic-rate tax credit. For a basic-rate taxpayer that's roughly the same as before — but a higher- or additional-ratelandlord now gets relief at only 20% instead of 40% or 45%.
| Taxable rental profit (rent − costs, not interest) | £11,900 |
| Tax at 40% | £4,760 |
| Less Section 24 credit (20% × £6,000) | − £1,200 |
| Income tax due | £3,560 |
Under the old rules (interest fully deductible) the bill would have been about £2,360 — so Section 24 costs this landlord roughly £1,200 more a year. Run your own figures →
The credit is technically 20% of the lowest of your finance costs, your property profit, or your income above the personal allowance — and it can't create a refund. Unused finance costs can be carried forward to a later year.
The stamp duty surcharge
Buying an additional property usually means a higher-rate stamp duty surchargeon top of the standard rates — 5% in England and Northern Ireland since 31 October 2024 (Scotland and Wales set their own). Factor it into your cash invested. The stamp duty calculator works out the bill.
Capital Gains Tax when you sell
When you sell a rental or second property, Capital Gains Tax is due on the gain above the £3,000 annual exempt amount, at 18% or 24%depending on your income. Private Residence Relief usually doesn't apply because it isn't your main home. Estimate it with the buy-to-let CGT calculator.
Should you use a limited company?
The Section 24 restriction doesn't apply to companies in the same way — a company pays Corporation Tax on profit after deducting mortgage interest. That's why some landlords incorporate. But a company brings different costs and rules: Corporation Tax, mortgage rates and fees that are often higher, more administration, and tax when you take the profit out. It isn't automatically cheaper, and moving existing property in can trigger CGT and stamp duty — take advice before deciding.
Reporting and deadlines
Most landlords report rental profit through Self Assessment by 31 January after the tax year. Making Tax Digital for Income Tax is also being phased in for landlords with higher property and self-employment income, which will mean digital records and quarterly updates — check whether and when it applies to you.
Frequently asked questions
How is rental income taxed in the UK?
Your rental profit — rent minus allowable running costs — is added to your other income and taxed at your normal Income Tax rate (20%, 40% or 45%, or the Scottish rates). Mortgage interest is treated separately under Section 24: you can’t deduct it as a cost, but you get a 20% basic-rate tax credit on it.
What is Section 24?
Section 24 is the rule, fully in force since 2020/21, that stops individual landlords deducting mortgage interest from their rental profit. Instead the interest is replaced by a basic-rate (20%) tax reduction. It means higher- and additional-rate landlords effectively get relief at only 20%, so their tax bill is higher than it used to be.
What expenses can a landlord deduct?
Allowable running costs include letting agent and management fees, landlord insurance, repairs and maintenance (not improvements), ground rent and service charges, accountancy, and the cost of replacing furnishings. You can’t deduct the mortgage capital repayment, improvements, or — since Section 24 — mortgage interest as a straight cost.
Do you pay stamp duty on a buy-to-let?
Usually yes, plus a surcharge. Most purchases of an additional residential property carry a higher-rate stamp duty surcharge (5% above the standard rates in England and Northern Ireland since 31 October 2024). Scotland and Wales have their own additional-property surcharges.
Do you pay Capital Gains Tax when you sell a rental?
Yes. Selling a rental or second property can trigger Capital Gains Tax on the gain above your £3,000 annual exempt amount, at 18% or 24% depending on your income. Private Residence Relief generally doesn’t apply because it isn’t your main home.
See the after-tax profit on a buy-to-let, including Section 24.
Buy-to-let profit calculator →