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Making Tax Digital

Mortgage interest under MTD: the box you put it in decides your tax bill

· 11 min read · Checked against HMRC's Property Income Manual (PIM2054 and PIM2058, updated 21 May 2026) and HMRC's quarterly update direction of 27 March 2026 · Updated

Do you report mortgage interest quarterly, or not?

You do. HMRC's quarterly update direction of 27 March 2026 sets out the quarterly reporting categories for a UK property business, and two of them are Residential property finance costs and Residential finance costs brought forward.

HMRC's digital record-keeping direction, issued the same day, goes further. It says residential finance costs must be recorded and sent separately, even by landlords who report a single total for their other expenses.

This matters because a large amount of published advice says the opposite. You will read that mortgage interest is “not reported quarterly”, that it is “a year-end adjustment only”, that it is “handled at the final declaration rather than in quarterly updates”. Many guides say it, and it is repeated confidently enough that you would be forgiven for believing it.

Nobody is lying. They are collapsing three separate things into one: reporting the cost, HMRC excluding it from your profit, and the basic-rate reducer being computed. All three happen. Only the last is a year-end event. The first is quarterly, mandatory, and the one that goes wrong.

Why the category you choose is the whole game

A UK property expense breakdown has a field called financialCosts and a separate field called residentialFinancialCost. They look like near duplicates. They are not. HMRC's quarterly update direction lists Non-residential property finance costs and Residential property finance costs as separate categories; financialCosts is the field for the first. HMRC's published calculation logic sums your allowable expenses from a specific list, and residential finance costs are deliberately not on it. They are pulled out and handled under allowances and reliefs instead.

So the same £10,000 of mortgage interest produces two completely different tax outcomes depending on which box it lands in.

residentialFinancialCostThe right boxDeducted from profitNoBasic rate reduction (2026-27)£2,000Relief, capped by three testsfinancialCostsThe wrong boxDeducted from profitIn fullBasic rate reduction£0Plausible figures. Wrong tax.
The same £10,000 of interest, in two different categories. Illustrative 2026-27 figures: at the announced 24% rate from 2027-28 the reduction would be £2,400. The mechanism is from HMRC's published calculation logic, which excludes residential finance costs from the allowable expenses total. In the wrong box the interest is deducted in full instead, which understates a higher or additional-rate landlord's tax.

This is a quiet failure. financialCosts is a valid field, so we would expect HMRC to accept the submission; we have not tested it. Your profit comes out too low, your relief comes out at zero, and if you pay higher-rate tax your bill comes out too low. That is the expensive direction: HMRC can collect it later, with interest. The numbers look reasonable enough that nobody notices. We know of no validation rule that catches it, though we cannot prove none exists, and we would not want to bet a tax return on the difference.

How much relief do you actually get?

Not 20% of your mortgage interest. That is the usual shorthand and it is only true when nothing else bites. HMRC applies the basic rate (20% for 2026-27) to the lowest of three figures (PIM2058):

(a)

Your finance costs

This year’s residential finance costs, plus anything unrelieved brought forward from earlier years.

(b)

Your adjusted property business profits

Profits for the year, after deducting any property losses brought forward. Relief cannot come out of a loss, so a heavily leveraged landlord with little or no profit gets little or no reduction, and the rest carries forward.

(c)

Your adjusted total income

Your net income from all sources, excluding savings and dividend income, less your personal allowances. If your income is near the allowance, this limb bites hard and it is the one that gets least attention.

Anything you cannot relieve this year is carried forward with no time limit, but only within the same property business. That caveat matters more than it looks. If that property business ceases (for UK property, you sell or stop letting every UK property), the balance is lost.

So the caps usually defer the part they block rather than destroy it, for as long as you keep letting. The restriction itself is different, and permanent: a higher-rate landlord gets 20% relief on interest they once deducted at 40%, and no carry-forward gives that back.

If you have more than one property business, HMRC apportions the income cap between them using a formula in PIM2058. The total relief comes out the same.

Why your tax bill rises even though your profit did not

Because your mortgage interest is no longer deducted, HMRC's idea of your property profit is larger than your actual profit, and that larger number feeds into your total income. GOV.UK has a worked example showing exactly this. It is also, we discovered, a decade out of date, and articles that quote it often repeat figures that no longer hold.

The example: a landlord with £35,000 of self-employment income, £18,000 of rent, £2,000 of other expenses and £8,000 of mortgage interest. GOV.UK computes their tax rising from £6,400 to £8,000, a £1,600 cost. Those numbers are correct. They are also calculated on 2016-17 thresholds: a personal allowance of £11,000 and a higher-rate threshold of £43,000.

Run the same landlord through 2026-27 thresholds (England, Wales and Northern Ireland rates), with a £12,570 allowance and a higher-rate threshold of £50,270, and the picture changes completely.

Same landlordGOV.UK, 2016-17Recomputed, 2026-27
Tax if interest were deductible£6,400£6,086
Tax under Section 24£8,000£6,232
Cost of Section 24£1,600about £146

They still cross into the higher-rate band, so the mechanism GOV.UK is illustrating is real and unchanged. But the higher-rate threshold has moved from £43,000 to £50,270, so only £730 of their income now sits above it rather than £8,000. The headline cost falls from £1,600 to roughly £146.

Do not read that as good news. It is a statement about this particular landlord, who is barely leveraged. Section 24 scales with borrowing: the more of your rent goes to the lender, the more you are taxed on income you never keep. A landlord with £18,000 of rent and £14,000 of interest is in a very different position from one with £8,000, and no amount of threshold drift rescues them.

GOV.UK's page also warns the example could drag the landlord into the High Income Child Benefit Charge, because their total income exceeds £50,000. That warning is now dead too: the charge starts at £60,000 from 2024-25, so their £51,000 triggers none of it. The mechanism is unchanged; the threshold moved. This is what happens when guidance is quoted rather than checked.

What changes in April 2027

From 2027-28 property income has its own rates. Budget 2026 announced 24%, 44% and 49%, up from the 22%, 42% and 47% in Finance Act 2026. The Finance Bill is not yet law. The finance cost reduction stays aligned to the property basic rate, so 24%. On the same figures as our example, with the thresholds at £12,570 and £50,270, and the personal allowance set against other income first as Finance Act 2026 requires, the 2027-28 bill would be £6,406 without Section 24 and £6,552 with it. Section 24 still costs £146, but the total bill is £320 higher than in 2026-27. The Treasury says these rates apply across England, Wales and Northern Ireland, and that Scotland and Wales can set property income rates in line with their current Income Tax powers. As at 8 November 2026, we found no published Scottish or Welsh decision for 2027-28.

Can you trust the in-year tax estimate your software shows you?

Treat it as a rough indication, and here is the honest reasoning rather than a confident answer.

HMRC's published calculation logic excludes residential finance costs from expenses and runs the reducer on the data you submit quarterly, so an in-year estimate should handle Section 24 correctly by design. We have not found any HMRC statement confirming that in terms, and we are not going to assert it. What we can say is that the estimate is unreliable for a more fundamental reason.

Two of the three caps are whole-year tests. Your property profit and your adjusted total income are both incomplete part-way through the year: the second update for 2026-27, which was due by 7 November 2026, covers only about half of it. Your employment income, dividends and savings may not have reached HMRC at all yet. Applying a whole-year cap to a part-year data set produces a number that is arithmetically valid and economically meaningless. HMRC's minimum standards require software that shows you an estimate to show a disclaimer about its accuracy; HMRC's suggested wording says it is based only on what HMRC has received so far.

What we could not verify. Whether HMRC's in-year calculation applies the reducer in practice, as opposed to in design. We have not tested it. If you have, we would like to hear from you.

A naming mess worth knowing about

The same figure has four names, which is its own small explanation of why this goes wrong so often. Your unrelieved interest from earlier years is called:

  • Residential finance costs brought forward in HMRC's quarterly update direction
  • residentialFinancialCostsCarriedForward in the Property Business API, which says carried where the direction says brought
  • residentialFinanceCostCarriedForward in HMRC's calculation logic, which drops the -ial from Financial, so the API and the engine spell the same word differently
  • Box 45 on the SA105 (box 44 is the current year)

They are the same number. It is the unrelieved amount coming into this year from earlier ones, added to your current interest before the caps are applied.

Two changes that catch people out

Holiday lets are now caught

Furnished holiday lets were excluded from the restriction until 5 April 2025: their finance costs were fully deductible. The FHL regime was abolished from 6 April 2025, so from 2025-26 a former holiday let is ordinary UK property and its mortgage interest is restricted like everyone else's.

Companies are not caught

Section 24 applies to individuals (alone or in partnership), trustees, personal representatives of deceased estates, and estate beneficiaries chargeable to income tax on estate income. A company carrying on a property business still deducts its finance costs in full, subject to a corporate interest restriction that only bites above £2m of net interest and so reaches almost no landlord. That asymmetry is a common reason landlords consider incorporating, and it is a decision with stamp duty and capital gains consequences well beyond the scope of a blog post.

Common questions

Is mortgage interest reported in MTD quarterly updates?

Yes. HMRC’s quarterly update direction lists "Residential property finance costs" and "Residential finance costs brought forward" as quarterly reporting categories for a UK property business. A good deal of published advice says the opposite. It is wrong: what happens at year end is the relief, not the reporting.

What happens if I put mortgage interest in the wrong expense category?

HMRC’s calculation logic deducts ordinary financial costs from your property profit but excludes residential finance costs, relieving them instead at the basic rate. So if you code residential mortgage interest as an ordinary financial cost, HMRC deducts it in full and gives you no basic-rate reduction. For a basic-rate taxpayer the bill comes out about the same. In 2026-27, for a higher or additional-rate taxpayer in England, Wales or Northern Ireland, it comes out too low by about 20p or 25p for each pound of interest that would otherwise be taxed at the higher or additional rate, and by about 40p where income is between £100,000 and £125,140 and the personal allowance is being withdrawn. Where the interest straddles the higher-rate threshold the gap is smaller: in our worked example it is £146 on £8,000. At the 2027-28 rates announced at Budget 2026 the higher and additional-rate gaps stay about 20p and 25p on the same basis (44% less 24%, 49% less 24%). Scottish rates give different figures. If that reaches your final declaration, HMRC can collect the difference with interest and, if it was careless, a penalty of up to 30% of it. We know of no validation rule that catches this, and the resulting figures look entirely plausible.

How much Section 24 relief do I actually get?

The basic rate (20% for 2026-27), applied to the lowest of three figures: your finance costs for the year plus any brought forward; your adjusted property business profits, meaning profits after deducting any property losses brought forward; and your adjusted total income, which is your income excluding savings and dividends, less your personal allowances. From 2027-28, Finance Act 2026 gives the relief at the property basic rate instead. Budget 2026 announced 24% for 2027-28; the Finance Bill is not yet law. HMRC sets out the calculation in PIM2058.

Why does Section 24 push me into a higher tax band?

Because mortgage interest is no longer deducted from your profit, your property business profit is higher than your economic profit, and that inflated figure feeds into your total income. GOV.UK’s worked example has a landlord with £35,000 of self-employment income, £18,000 of rent, £2,000 of other expenses and £8,000 of mortgage interest crossing into the higher-rate band. Note that GOV.UK computed it on 2016-17 thresholds; on 2026-27 thresholds (England, Wales and Northern Ireland rates) the same landlord still crosses the threshold, but Section 24 costs them about £146 rather than the £1,600 the page shows.

Does Section 24 apply to limited companies?

No. The restriction applies to individuals (alone or in partnership), trustees, personal representatives of deceased estates, and estate beneficiaries chargeable to income tax on estate income. Companies carrying on a property business are outside it and continue to deduct finance costs as an ordinary expense.

Does Section 24 now apply to furnished holiday lets?

Yes, from 2025-26. Furnished holiday lets were excluded from the definition of a dwelling-related loan until 5 April 2025, so their finance costs were fully deductible. The FHL regime was abolished from 6 April 2025, so former FHLs are now ordinary UK property and their finance costs fall within the restriction.

Sources

Primary sources. Where the market disagrees with HMRC, we have cited HMRC.

Related

Why your second MTD update looks twice as big as your first explains the cumulative model that puts this figure in front of you four times a year.

Missed the 7 August MTD deadline? covers what a late quarterly update costs, and what it does not.

Written by Ben Morton, founder of LetSort. I build our HMRC Making Tax Digital integration directly against the API: OAuth, fraud prevention headers, the cumulative period summary, and the Section 24 calculation described above. Every figure here is checked against HMRC's Property Income Manual rather than against what other software companies have written, which is how we found that some of them have this one wrong. LetSort is operated by ToggleKit Ltd.