Buy-to-let has transformed from a largely tax-efficient investment into a heavily taxed one over the past decade. The introduction of Section 24 removed mortgage interest as a deductible expense for individual landlords and fundamentally changed the maths. Here is what every landlord needs to understand before buying in 2026.
Use the Buy-to-Let Calculator to model your monthly profit and annual tax position with full Section 24 accounting.
What Changed: The Section 24 Timeline
Prior to April 2017, landlords could deduct all mortgage interest directly from rental income before calculating tax. A landlord receiving £12,000 rent and paying £7,000 interest was taxed on £5,000 profit.
The rules were phased in from 2017 to 2020. Since April 2020, the full Section 24 rules apply:
- Rental income is calculated without deducting mortgage interest
- Tax is then calculated on that higher figure
- A 20% tax credit on mortgage interest is applied against the tax bill
The result: higher-rate taxpayers pay significantly more tax than under the old system. Some basic-rate taxpayers are pushed into the higher rate by the artificially inflated taxable income.
How Section 24 Tax Is Actually Calculated
Here is a worked example for a higher-rate (40%) taxpayer:
Gross annual rent: £18,000 Annual mortgage interest: £9,000 Other allowable costs (management, insurance, repairs): £3,000
Under old rules:
- Taxable profit = £18,000 - £9,000 - £3,000 = £6,000
- Tax at 40% = £2,400
Under Section 24:
- Taxable income = £18,000 - £3,000 (only non-finance costs) = £15,000
- Tax at 40% = £6,000
- Less 20% mortgage interest credit = 20% x £9,000 = £1,800
- Tax due = £4,200
The tax bill is 75% higher despite the economic profit being identical.
How to Calculate Gross and Net Rental Yield
Rental yield is the return you get from rent as a percentage of the property value. Estate agents quote gross yield. You need net yield.
Gross yield: Annual rent divided by property purchase price, multiplied by 100.
Example: Property bought for £200,000, renting for £1,000 per month.
- Annual rent: £12,000
- Gross yield: (12,000 / 200,000) x 100 = 6%
Net yield: Accounts for all costs including voids, management fees, maintenance, insurance, and ground rent.
Using the same property:
| Cost item | Annual amount |
|---|---|
| Letting agent (10%) | £1,200 |
| Buildings insurance | £400 |
| Maintenance allowance (1% of value) | £2,000 |
| Voids allowance (4 weeks) | £923 |
| Total costs | £4,523 |
- Net annual income: £12,000 - £4,523 = £7,477
- Net yield: (7,477 / 200,000) x 100 = 3.7%
The difference between 6% and 3.7% is the gap between the number agents quote and the return you actually receive. Always calculate net yield before comparing properties.
Use the Rental Yield Calculator to run this calculation with your own numbers.
Monthly Cash Flow: What You Actually Pocket
Yield tells you the annual return as a percentage. Cash flow tells you the monthly number in pounds. For most landlords in 2026, cash flow is the sharper question.
Example: £200,000 property, 25% deposit (£50,000 down), £150,000 mortgage at 5% over 25 years.
| Item | Monthly |
|---|---|
| Rental income | £1,000 |
| Mortgage payment | -£877 |
| Agent fee (10%) | -£100 |
| Insurance | -£33 |
| Maintenance reserve | -£167 |
| Monthly cash flow | -£177 |
This property loses £177 per month before tax at 75% LTV and a 5% mortgage rate. The numbers only work if you expect capital appreciation to compensate, or if you put in a larger deposit to reduce the mortgage payment.
At 50% LTV (£100,000 mortgage, approximately £585/month payment), the same property generates approximately £115 per month positive cash flow before tax.
Use the Buy-to-Let Calculator to model your specific deposit, rate, and rental income.
Allowable Expenses (Section 24 Context)
These costs can still be deducted from rental income:
- Letting agent fees
- Property maintenance and repairs
- Buildings and contents insurance
- Ground rent and service charges (leasehold)
- Council tax (only if paid by landlord, for example during voids)
- Accountancy fees
- Gas safety certificates, EPCs, and other compliance costs
These cannot be deducted:
- Mortgage capital repayments
- Mortgage interest (subject to Section 24, only 20% credit applies)
- Capital improvements (these are for CGT purposes, not income tax)
The Limited Company Alternative
Many landlords have moved their portfolios into limited companies (usually a Special Purpose Vehicle, SPV) to avoid Section 24. Inside a limited company:
- Mortgage interest is fully deductible as a business expense
- Corporation tax (currently 19% on the first £50,000 profit, 25% above) applies
- Profits can be retained inside the company, deferring personal income tax
However, limited companies have their own costs:
- Accountancy fees are higher (£800-£2,000+ per year)
- Mortgage products are fewer and often more expensive
- Transferring existing properties into a limited company triggers CGT and SDLT
For new investors starting from scratch with higher-rate incomes, a limited company structure is often more tax-efficient from day one. For established individual landlords, the costs of transferring usually outweigh the tax savings.
Capital Gains Tax on Sale
When you sell a buy-to-let property, Capital Gains Tax applies to the profit:
- 18% for basic-rate taxpayers
- 24% for higher and additional-rate taxpayers (reduced from 28% in April 2024)
The annual CGT exemption is now just £3,000 (reduced from £12,300 in 2023/24). This makes CGT a significant exit cost for most landlords.
Costs you can deduct from the gain:
- Original purchase price
- Stamp duty paid on purchase
- Legal fees on purchase and sale
- Capital improvements (not maintenance)
- Estate agent fees on sale
Stamp Duty Costs for Buy-to-Let
Buy-to-let purchases in England attract the standard 3% additional property surcharge on top of normal SDLT. On a £250,000 property:
- Standard SDLT: £0 (within the nil-rate band)
- Additional property surcharge: 3% x £250,000 = £7,500
This upfront cost directly affects your total ROI. Always factor it in when calculating your break-even period.
Is Buy-to-Let Still Worth It in 2026?
The honest answer: it depends entirely on your tax position, mortgage rate, deposit size, and investment goals.
Still makes sense if:
- You are a basic-rate taxpayer
- You use a limited company structure (higher earners)
- You invest in high-yield areas (5%+ gross, net above 4%)
- You have a long-term horizon with capital growth expectations
- You have a large deposit reducing mortgage dependence (50%+ LTV)
Much harder to justify if:
- You are a higher-rate taxpayer with a large mortgage
- Interest rates remain elevated (5%+) and your LTV is above 65%
- You are in a low-yield area (London, sub-4% gross)
- You need short-term income returns rather than long-term capital growth
The numbers that change the conclusion most are deposit size and mortgage rate. A landlord with a 50% deposit at a 4.5% rate in a 6% gross yield area can make a reasonable return. A landlord with a 25% deposit at 5.5% in a 4% gross yield area cannot.
Run the full numbers in the Buy-to-Let Calculator before committing. The difference between a viable and unviable investment often comes down to a few percentage points that are easy to underestimate without modelling them.