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What is Basic rate tax reduction?
Last verified 31 October 2026
The basic rate tax reduction is the 20% reduction in your Income Tax bill that replaced a full deduction for mortgage interest on residential lets. It equals 20% of the lowest of three amounts: your finance costs, your property business profits, and your adjusted total income above the Personal Allowance.
Why it matters to landlords
Because the reduction is capped by the lowest of those three, a landlord with high borrowing and modest profits may get less than 20% of the interest paid. The reduction cannot create a refund. If profits or income are the lowest figure, the shortfall is carried forward to later years.
The four year phase-in is over: from 2020 to 2021 onward, none of the finance costs are deducted from rental income and the whole relief comes through the reduction. It applies to individuals, partners in partnerships and trusts that let residential property. UK and non-UK resident companies are not affected.
Example
Neil has rent of £20,000, mortgage interest of £8,000 and other expenses of £3,000. His profit is £17,000, because interest is not deducted. His income above the Personal Allowance is well over £17,000. The lowest of the three amounts is the £8,000 of finance costs, so his tax falls by 20% of that, which is £1,600.
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