Do I Pay Tax on Rental Income If I Have a Mortgage?

Yes. Having a mortgage does not exempt your rental income from tax. If you own a residential rental property personally, you generally pay Income Tax on your taxable property profit after allowable expenses.

The important difference for a mortgaged property is that mortgage interest is not deducted from rental income in the same way as most allowable expenses. Instead, individual residential landlords currently receive a basic-rate finance cost tax reduction, generally calculated at 20% of qualifying finance costs.

Capital repayments of the mortgage do not qualify for tax relief.

How Is Rental Income Taxed If You Have a Mortgage?

For an individual landlord, the broad calculation is:

1. Add up your rental income.
2. Deduct allowable property expenses, such as qualifying repairs, letting-agent fees and insurance.
3. Do not deduct residential mortgage interest when calculating the property profit.
4. Calculate the Income Tax due on your taxable income.
5. Apply the residential finance cost tax reduction where you qualify.

So it is not accurate to say that landlords simply pay tax on their “full rental income”. You pay tax on taxable property profit after allowable expenses, but mortgage interest receives separate relief rather than being deducted when that profit is calculated.

For a broader explanation of what can be deducted, see our guide to allowable expenses for landlords. HMRC also explains the calculation in its guidance on working out rental income and taxable profit.

Can Landlords Deduct Mortgage Interest From Rental Income?

If you own residential rental property personally, no — mortgage interest is not normally deducted when calculating your taxable property profit.

Instead, the residential finance cost rules provide a tax reduction. For 2026/27, that reduction is generally calculated at 20% of the qualifying finance costs that can be relieved.

Finance costs can include:

• Mortgage interest.
• Interest on loans used to buy furnishings for the rental business.
• Certain fees and incidental costs of obtaining or repaying qualifying finance.

The capital element of a mortgage repayment does not qualify.

There are also limits on how much finance cost can be used for the tax reduction in a particular year. Broadly, the calculation can be restricted by your finance costs, property business profits and adjusted total income. Unused qualifying finance costs may be carried forward.

For the detailed rules and history of the restriction, see our dedicated Section 24 guide.

Worked Example: Rental Income With a Mortgage

Assume a landlord has:

• £15,000 of rental income.
• £2,000 of other allowable expenses.
• £6,000 of qualifying mortgage interest.
• Enough other income for all of the property profit in this example to fall within the 40% higher-rate band.
• No restriction preventing the full £6,000 of finance costs being used for the tax reduction.

Their 2026/27 calculation would look like this:

The key point is that the landlord is not taxed on the £15,000 gross rent without any deductions. The £2,000 of allowable expenses reduces the property profit to £13,000.

However, the £6,000 mortgage interest does not reduce that £13,000 property profit. It is used separately to calculate the finance cost tax reduction.

This is why highly mortgaged landlords can sometimes have a much lower cash profit than the property profit used in their Income Tax calculation.

What Changes for Mortgage Landlords From 6 April 2027?

From 6 April 2027, property income will have separate Income Tax rates in England, Wales and Northern Ireland:

• 22% property basic rate
• 42% property higher rate
• 47% property additional rate

At the same time, residential finance cost relief will be calculated at the new 22% property basic rate, rather than 20%.

The underlying principle remains the same: individual landlords do not deduct qualifying residential mortgage finance costs from property profit. Relief is given separately as a tax reduction.

See the government's technical note on the 2027 property income tax changes.

Personal Ownership vs Limited Company: What Happens to Mortgage Interest?

The residential finance cost restriction applies to individuals. UK companies are not subject to the restriction in the same way and can generally obtain relief for qualifying finance costs when calculating company profits.

That does not mean a limited company is automatically the better option. Mortgage pricing, administrative costs, tax on extracting profits and the tax cost of transferring an existing property can all change the result.

If you are considering incorporation primarily because of mortgage interest relief, get individual advice from a qualified property tax adviser before restructuring ownership.

Does Making Tax Digital Change How Mortgage Interest Is Taxed?

No. Making Tax Digital for Income Tax changes how landlords within scope keep records and report information to HMRC; it does not turn mortgage interest into an ordinary deductible expense for an individual residential landlord.

MTD for Income Tax has applied from 6 April 2026 to qualifying sole traders and landlords whose qualifying income was over £50,000, with lower thresholds applying from April 2027 and April 2028.

Rather than duplicating those reporting rules here, see our full Making Tax Digital for landlords guide.

Keeping Records for a Mortgaged Rental Property

Keep records showing both your rental income and the costs associated with the property, including mortgage statements that separate interest and finance charges from capital repayments.

Landlord Studio can help you keep rental income, expenses, receipts and property records organised throughout the year. If you are within MTD for Income Tax, you should also make sure your record-keeping and submission process meets HMRC's digital requirements.

Learn more about rental accounting with Landlord Studio.

Frequently Asked Questions

Do I pay tax on rental income if my property has a mortgage?

Yes. A mortgage does not make rental profit tax-free. Individual landlords generally pay Income Tax on taxable property profit after allowable expenses, with qualifying residential mortgage finance costs receiving a separate tax reduction rather than being deducted from property profit.

Do I pay tax on the full rent I receive?

Not necessarily. Allowable property expenses can be deducted when calculating taxable property profit. The key exception covered by this article is residential mortgage interest for individual landlords, which is generally relieved separately through the finance cost tax reduction.

For a broader overview, see our guide to tax on rental income.

Can I deduct my full mortgage payment?

No. Capital repayments do not qualify for finance cost relief. The relevant amount is generally the qualifying interest and finance-cost element, subject to the applicable rules and limits.

What if my mortgage interest is more than my rental profit?

The finance cost tax reduction can be limited. Broadly, the amount used is restricted by factors including your qualifying finance costs, property business profits and adjusted total income. Qualifying finance costs that cannot be relieved in the current year may be carried forward.

Is mortgage interest fully deductible through a limited company?

The restriction that applies to individual residential landlords does not apply to UK companies in the same way. A company can generally obtain relief for qualifying finance costs when calculating its profits, but the overall tax position also depends on Corporation Tax, how profits are withdrawn and the costs of company ownership.

What happens to mortgage interest relief in April 2027?

From 6 April 2027, the property basic rate in England, Wales and Northern Ireland will be 22%, with higher and additional property rates of 42% and 47%. Residential finance cost relief will also be calculated at 22%.

If you have a mortgage on a rental property, you can still have an Income Tax bill

For an individual landlord, the important distinction is that ordinary allowable expenses reduce your taxable property profit, while residential mortgage interest is generally dealt with separately through a finance cost tax reduction.

That distinction matters most for landlords with larger mortgages and those paying tax above the basic rate.

For the wider rules, use our dedicated guides to Section 24, allowable expenses, rental income tax and Making Tax Digital.

This article is for general informational and educational purposes only and does not constitute tax, legal or financial advice. Tax rules and individual circumstances vary. Speak to a qualified tax professional about your own position.