Got a couple of flats or a buy-to-let? The tax rules have shifted - and whether you own them personally or through a company makes a big difference to your bill. Without the right setup, you could be paying far more tax than you need to.
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1. Here's a Solution to Save You Money
The good news is, there are still ways for you to cut down your tax bill and keep more of your rental profits. Here are some strategies many landlords are using:
Set up a Limited Company: If your properties are held in a company, you can still deduct mortgage interest in full. While profits are taxed at Corporation Tax rates (19–25%), this can be cheaper than paying higher-rate Income Tax. Plus, you can reinvest profits into more properties before paying personal tax.
Restructure Your Debt: Since interest relief is capped at 20%, paying down mortgages can reduce the extra tax you're facing.
Convert to a Furnished Holiday Let (FHL): These are treated as businesses, so you still get full mortgage interest relief. You also benefit from other perks like capital allowances.
Transfer Ownership to Your Spouse/Partner: If they're in a lower tax band, transferring some or all of your property income to them can cut your overall tax bill.
Diversify Your Investments: You could move some money into commercial property, REITs, or other investments outside of buy-to-let.
📊 Tax Costs – Private Landlord vs Limited Company
Scenario: Rental income: £30,000. Expenses (insurance, repairs & maintenance, agent fees, safety certs): £5,000. Mortgage interest: £10,000. Higher-rate taxpayer (40%).
Private Landlord (post-2020 rules)
Taxable profit (ignores mortgage interest): £30,000 – £5,000 = £25,000
Income Tax @ 40% = £10,000
Mortgage interest relief = 20% × £10,000 = £2,000
✅ Net tax = £8,000
Limited Company (profits reinvested)
Taxable profit (after full mortgage deduction): £30,000 – £5,000 – £10,000 = £15,000
Corporation Tax @ 25% = £3,750
✅ Net tax = £3,750 (if profits left in the company)
Limited Company (profits withdrawn as dividends)
Post-tax profit = £11,250
Dividend allowance = £1,000
Taxable dividends = £10,250
Dividend tax @ 33.75% = £3,459
Total = £3,750 (corp tax) + £3,459 (dividend tax) = £8,475
🔎 Key Takeaway
Private landlord: £8,000
Ltd (profits reinvested): £3,750
Ltd (profits withdrawn): £8,475
Ltd is better if you reinvest profits, because you only pay the Corporation Tax.
By using one or more of these strategies, you can protect your profits and stop your tax bills from eating too far into your rental income.
2. What is the Problem?
Before 2020, you could deduct all your mortgage interest (and other finance costs) from your rental income before working out your tax. This meant if you were a higher-rate taxpayer, you could claim 40% or even 45% relief.
But in April 2020, the government scrapped this system. Now, you only get a flat 20% tax credit on your finance costs, no matter which tax band you're in.
3. Implications That Bring It to Life
Here's why this matters to you:
Your taxable income looks higher, because mortgage interest isn't deducted anymore. This could push you into a higher tax band.
If you're a higher-rate taxpayer, you lose out big time - your relief drops from 40% or 45% down to just 20%.
If you're a basic-rate taxpayer, things don't change much - but you could still get dragged into the higher-rate bracket.
Example (before 2020):
Rent: £30,000
Mortgage interest: £18,000
Other expenses (e.g. building insurance, repairs and maintenance, letting agent fees): £2,000
Taxable profit = £10,000
Example (after 2020):
Rent: £30,000
Mortgage interest: £18,000
Other expenses (e.g. building insurance, repairs and maintenance, letting agent fees): £2,000
Taxable profit = £12,000
Relief: 20% × £18,000 = £3,600
👉 So instead of paying tax on £10,000, you now pay tax on £12,000 - with just £3,600 knocked off afterward.
On a larger scale:
Rental income: £90,000
Expenses: £15,000 (e.g. building insurance, repairs and maintenance, letting agent fees, safety certificates)
Mortgage interest: £30,000
You're a 40% taxpayer
Old rules: £45,000 profit × 40% = £18,000 tax
New rules: £75,000 profit × 40% = £30,000 tax – £6,000 relief = £24,000
👉 That's £6,000 more tax out of your pocket.
4. Possible Solutions
You still have some tools available to reduce your tax bill:
Claim Your Allowable Expenses: Repairs, insurance, letting agent fees, utilities (if you pay them), and even replacing sofas or white goods can all be deducted in full.
Consider Furnished Holiday Lets (FHLs): If you meet the conditions, you'll enjoy much better tax treatment.
Look at Limited Companies: Companies can still deduct all mortgage interest, though you'll need to factor in Dividend Tax if you take profits out personally.
Use Rental Losses Wisely: Losses (excluding mortgage interest) can be carried forward to offset future profits.
By planning carefully, you can soften the blow of Section 24 and stop it from taking too much of your rental income.
5. Conclusion
The rules on landlord tax relief have completely changed. You can no longer deduct your mortgage interest from rental income - instead, you only get a flat 20% credit. For many landlords, that means higher tax bills and lower profits.
But here's the good news: you still have options. By restructuring your portfolio, considering incorporation, making use of allowable expenses, or even switching to holiday lets, you can take control of your tax position.
👉 In short: with the right planning, you can stop Section 24 from eating into your profits - and keep more of your hard-earned rental income in your pocket.
Have questions about your finances? Reach out today for advice that fits your situation.
