Why Your Section 24 Relief Is Less Than 20% of Your Interest
Most explanations of the mortgage interest restriction stop at "you get 20% back". That is the headline, and for a lot of landlords it is also wrong — not because the rate is different, but because the reduction is 20% of the lowest of three amounts rather than 20% of the interest you paid. When one of the other two is smaller, part of your interest produces no relief at all that year. Worse, which of the three is the binding one decides something that matters more than the shortfall itself: whether the unused part carries forward to a later year, or is simply gone.
Enter your rent, expenses and interest in the rental income calculator — it shows all three limits and names the one that is binding.The Three Limits, and Why Two of Them Surprise People
HMRC restricts the basic rate reduction to the lowest of three figures: the finance costs you have not deducted, the profit of your property business, and your total income above the Personal Allowance. The first is the one everybody expects. The second catches landlords in a year when repairs, a void period or a bad tenant flattened the profit — the interest was still paid, but there is little profit for the reduction to sit against. The third catches a different group entirely: landlords whose other income is small. A retired landlord with a large mortgage and no salary can find the third limit is by far the smallest of the three, because there is not much income above the allowance for a reduction to reduce. None of this is discretionary, and none of it shows up if a calculator simply multiplies your interest by the basic rate.
Carry Forward Depends on Which Limit Bit
This is the part almost nothing explains, and the part with real money in it. If the reduction was limited by your property profit, the unused finance costs carry forward and can be used in a later year. If it was limited by your income above the Personal Allowance, they do not — that relief is gone. Two landlords can end a year with an identical unused amount and identical paperwork, and one of them still has an asset while the other has lost it. Because the difference is invisible in the final tax figure, the only way to know which happened is to look at which limit was the smallest, which is exactly why a calculator that hands you one number is not enough.
Why Heavy Borrowing Can Move You Into a Higher Band
Before the restriction, interest reduced your rental profit, so it reduced your income. Now it does not: your income is measured before the interest, and the interest comes back only as a reduction against tax already worked out. For a highly geared landlord this can lift total income into the higher rate band even though the cash reaching them has not changed at all. The old arithmetic, still used by many free calculators, hides this completely — it subtracts interest first, keeps the income figure low, and reports a tax bill that no longer matches how the rules work.
What to Do With This
Two practical consequences. First, treat the binding limit as a number worth knowing, not a technicality: it tells you whether an unused amount is a deferred asset or a loss. Second, when comparing years or properties, compare the limits rather than only the tax due — a year where profit was the constraint and a year where income was the constraint look similar on the return and behave completely differently afterwards. Anything beyond the arithmetic, particularly whether incorporation or a different ownership structure would suit you, is a question for an accountant rather than a calculator.