You're a 40% landlord. How to save tax on your rental income.

You've got a good salary, a rental flat, and a nasty surprise every January: the tax on that flat is far bigger than it used to be. That's Section 24 doing its work. The good news is there are several legal ways to save tax on your rental income - from the boring-but-vital basics to three bigger moves. None of them is a free lunch.

First, the problem: Section 24

Since April 2020, an individual landlord can no longer deduct mortgage interest from rental income. Instead you get a flat 20% tax credit on the interest. If you're a higher-rate taxpayer, that's the whole problem in one sentence: you're taxed at 40% on profit that now includes your interest, but you only get 20% of that interest back.

Take £20,000 of rent, £10,000 of mortgage interest and £3,000 of other costs. Your taxable profit is £17,000 (interest no longer deducted), so £6,800 of tax at 40%, minus a £2,000 credit - £4,800 due. Under the old rules it would have been £2,800. Section 24 costs this landlord £2,000 a year, and the effective tax rate on their real £7,000 profit is nearly 69%.

“Section 24 doesn't tax your profit. It taxes your turnover, then hands back a fraction of the interest.”

First, the boring wins (do these before anything clever)

Before any restructuring, make sure you aren't overpaying by accident. Claim every allowable expense - repairs, letting-agent fees, landlord insurance, ground rent, accountancy, even the interest on a loan to furnish the place. If your total property income is under £1,000, the property allowance may mean you owe nothing at all. And if you own with a lower-earning spouse, holding a bigger share in their name (via a declaration of trust and Form 17) can move rental profit out of the 40% band entirely. None of these are loopholes - they're the rules working as intended, and they come before anything below.

Option 1: Move it into a company

Companies aren't caught by Section 24 - they deduct mortgage interest in full and pay corporation tax on what's left (19% up to £50,000 of profit, rising to 25% over £250,000). For a heavily-mortgaged higher-rate landlord who reinvests, that can be a big saving.

The catch is getting there and getting the money out. Moving a property you already own is a sale at market value: you can trigger Capital Gains Tax (18% or 24% on residential gains, after a £3,000 allowance), and the company pays Stamp Duty with a 5% surcharge on top of the normal rates. Incorporation relief can defer the CGT, but only for a genuine property business run hands-on - a flat left with a letting agent usually won't qualify. And when you finally draw the profit as dividends (taxed at 35.75% for a higher-rate taxpayer from April 2026, up from 33.75%), the combined bill can be worse than 40%. A company wins when you keep and reinvest the profit - and especially on new purchases, where there's no CGT or extra Stamp Duty to exit.

Option 2: Salary sacrifice

This one is about your job, not your flat. You give up some salary and your employer pays it straight into your pension. Because that pay never lands, you dodge the 40% income tax and the National Insurance on it - and some employers add their own NI saving too. It won't cut the tax on your rent, but it lowers your total income.

The underrated bonus: salary sacrifice reduces your adjusted net income. If your salary plus rent tips you over £100,000, every £2 above it costs you £1 of personal allowance - an effective 60% tax band up to £125,140. Sacrificing salary back under £100,000 hands that allowance back, and can wipe out the High Income Child Benefit Charge too.

Option 3: Pay into a SIPP

Here's the idea landlords love: your rent has pushed a chunk of income into the 40% band, so you pay that same amount into a pension and pull it back down to 20%. The mechanics are neat. Pay in £8,000 and your provider adds £2,000 basic-rate relief, so £10,000 is invested. As a higher-rate taxpayer you reclaim another £2,000 through your self-assessment. Net cost: £6,000 for £10,000 working for you.

The catch nobody mentions: you can't out-contribute your salary

This is the part that trips landlords up. Tax relief on pension contributions is capped at 100% of your 'relevant UK earnings' - and rental income doesn't count. It's investment income, not earnings. So if your salary is £60,000, you can get relief on up to £60,000 of gross contributions, no matter how much rent you collect. If rent were your only income, you'd be limited to just £3,600 gross a year. The £60,000 annual allowance is a ceiling, not a floor - your salary is the real limit.

And it isn't free money - it's deferred

A pension doesn't erase the tax; it reshapes it. You get 40% relief going in, but coming out only the first 25% is tax-free - the rest is taxed as income at whatever your rate is in retirement. The genuine wins are three: 40% relief now against, quite possibly, 20% tax later; years of tax-free growth inside the wrapper; and that 25% tax-free slice. The genuine costs: the money is locked until age 57, and future governments can change the rules.

So which one?

If you're an employee with a landlord sideline, the SIPP is usually the most accessible lever - real 40% relief, no property to refinance - as long as you accept it's locked away and your salary sets the limit. Salary sacrifice stacks neatly on top, especially if you're near the £100,000 allowance trap. A company is the heavy machinery: powerful for a growing, leveraged portfolio you'll reinvest, rarely worth the exit tax for one existing flat. Most people's honest answer is a combination - and, because the numbers here turn on your exact income and gains, one worth checking with an accountant before you act.