I'm a limited company landlord. How does Section 24 interest relief restriction affect my personal tax liability if I also have income from other sources, and what are the best strategies to mitigate this impact from my buy-to-let portfolio?

Quick Answer

Section 24 directly impacts individual landlords, not limited companies. For limited company landlords, personal tax arises from profit extraction via salary or dividends, which needs careful planning.

## Does Section 24 directly affect limited companies? Section 24 of the Finance (No. 2) Act 2015, which restricts mortgage interest relief for residential landlords, does not directly apply to properties held within a limited company structure. Since April 2020, individual landlords can no longer deduct finance costs, such as mortgage interest, from their rental income before calculating their tax liability. Instead, they receive a basic rate tax credit equivalent to 20% of their finance costs. This change primarily targets individual landlords, aiming to level the playing field between owner-occupiers and buy-to-let investors in terms of mortgage interest deductions. For a limited company, all legitimate business expenses, including mortgage interest and other finance costs, remain fully deductible against rental income. This means the company calculates its profit after deducting all expenses, including 100% of the mortgage interest. Corporation Tax is then applied to this net profit. The Corporation Tax rate is 19% for profits under £50,000, 25% for profits over £250,000, and there's marginal relief for profits between £50,000 and £250,000. Therefore, the immediate impact on the company's profit and tax bill is favourable compared to an individual landlord, as the full interest deduction reduces the taxable profit before Corporation Tax. The separation of the company's finances from personal finances is key here. The company is a distinct legal entity, and its tax obligations are separate from those of its directors or shareholders. The challenges for limited company landlords typically arise when they need to extract profits from the company for personal use, which is where personal tax implications come into play, especially when they have other income sources. ## How does profit extraction from a limited company impact personal tax liabilities? Extracting profits from a limited company primarily impacts personal tax liabilities through dividends or salaries. As a company director or shareholder, you can choose to draw a salary, which is subject to PAYE (Pay As You Earn) income tax and National Insurance contributions, or you can take dividends from the company's post-Corporation Tax profits. Many limited company landlords opt for a combination of a small salary (often up to the personal allowance) and dividends for tax efficiency. Dividends are taxed differently from salaries. There is a tax-free dividend allowance, currently £1,000 for the 2026/27 tax year, after which dividends are taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. These rates are applied to your dividend income after your personal allowance and any other income you have received, such as from employment or other investments. Your total income determines which tax band your dividends fall into. For example, if you have a salary of £30,000 and £20,000 in dividends, the first £1,000 of dividends is tax-free, and the remaining £19,000 will be taxed at 8.75% as it falls within the basic rate band, assuming no other deductions or allowances. If your other income pushes your total earnings into the higher or additional rate bands, your dividends will be taxed at the respective higher rates. When you have significant income from other sources, such as a high-paying job, this can quickly push your overall income into the higher or additional rate tax brackets. This means that any dividends you extract from your property company, even if the company itself has benefited from full mortgage interest deduction, will be taxed at 33.75% or 39.35% personally, after the £1,000 allowance. For instance, a higher rate taxpayer extracting £50,000 in dividends would pay approximately £16,500 in dividend tax (excluding the allowance), a substantial personal tax burden. This contrasts with the individual landlord who, despite Section 24, might benefit from a 20% tax credit on mortgage interest but would still pay income tax on their net rental profit at their marginal rate. ## What are effective strategies to mitigate personal tax impact from a limited company portfolio? Several strategies can mitigate the personal tax impact when running a limited company buy-to-let portfolio, especially for those with other income sources. The primary focus is on how and when profits are extracted, or how they are reinvested within the company. One common strategy involves **reinvesting profits within the company**. Instead of extracting all profits as dividends, you can retain them within the company to fund further property purchases, undertake refurbishments, or reduce existing company debt. This defers personal tax liabilities, as tax is only paid when the money is distributed to you personally. The capital growth generated within the company is also only subject to Corporation Tax upon sale, then personal CGT on liquidation (if you liquidate and take capital distributions) or dividend tax on extraction. For example, £100,000 of retained profit used to purchase another property would not incur any personal income tax at that point. Another strategy is to **optimise salary and dividend split**. Many directors pay themselves a small salary up to the personal allowance (currently £12,570) to utilise their tax-free threshold and potentially minimise National Insurance contributions. Any further income is then typically taken as dividends. However, if you have substantial other income, even a small dividend can push you into higher tax brackets. Regularly review your overall personal income and the company's profitability to determine the most tax-efficient split for your specific circumstances. A higher-earning individual might consider taking minimal dividends for several years, relying on their other income, and building up retained profits within the company. **Spreading ownership and profit extraction** can also be effective. If your spouse or another family member is a shareholder in the company and has lower personal income, you can distribute dividends to them. This can utilise their personal allowance and lower dividend tax bands, reducing the overall household tax burden. For instance, if your spouse has no other income, they could receive £12,570 personal allowance, plus £1,000 dividend allowance tax-free, and further dividends taxed at 8.75%. This requires careful planning and ensuring that the share structure accurately reflects ownership and contributions. Consider the **timing of profit extraction**. If you anticipate a period of lower personal income in the future (e.g., retirement, sabbatical, or a change in employment), deferring dividend payments until that time could result in a lower personal tax liability. This long-term planning requires financial discipline but can yield significant tax savings. For example, delaying a £70,000 dividend payment from a year where you earn £100,000 (higher rate) to a year where you earn £20,000 (basic rate) could save you over £17,000 in personal tax on that dividend (33.75% vs 8.75% on a large portion of the dividend). Finally, exploring **pension contributions via the company** can be a tax-efficient way to extract value. Employer pension contributions are deductible against the company's profits, reducing Corporation Tax. They are also not subject to National Insurance or income tax at the point of contribution for the individual, although tax will be paid when the pension is accessed in retirement. This can be particularly attractive for higher-rate taxpayers as it effectively allows you to bypass immediate personal tax liabilities on that portion of profit, investing it for your future. The amounts are subject to annual and lifetime allowances, but it's a powerful tool for long-term wealth building outside the immediate personal income tax net. A company contributing £40,000 to your pension could save the company £7,600-£10,000 in Corporation Tax and avoid you paying 33.75-39.35% dividend tax on that sum personally. ## Are there any specific tax reliefs or allowances available to limited companies or their directors? Yes, several specific tax reliefs and allowances are available that can benefit limited companies and their directors, impacting overall tax efficiency. As mentioned, the company itself benefits from the **full deduction of mortgage interest and other finance costs** against rental income before Corporation Tax is calculated. This is a fundamental advantage over individual landlords under Section 24. Directors can utilise their **personal allowance** (currently £12,570) to take a tax-free salary, reducing their overall taxable income. Additionally, the **dividend allowance** (currently £1,000) provides a small amount of tax-free dividend income. For companies meeting specific criteria, **Business Asset Disposal Relief (BADR)**, formerly Entrepreneurs' Relief, can reduce Capital Gains Tax to 10% on qualifying business disposals up to a lifetime limit of £1 million. This is relevant if you plan to eventually sell the company or wind it up, as profits distributed upon company liquidation might qualify for this lower CGT rate rather than dividend tax. Furthermore, companies can claim **capital allowances** on qualifying plant and machinery, including integral features in a property, reducing taxable profits. For example, if a limited company invests £20,000 in new heating systems or sanitary equipment, it might be able to claim capital allowances, accelerating tax relief on these expenditures. Professional advice is crucial to ensure eligibility and maximise these reliefs. ## What factors should I consider when reviewing my limited company structure and profit distribution strategy? When reviewing your limited company structure and profit distribution strategy, several critical factors warrant careful consideration. Firstly, your **personal financial goals and timelines** are paramount. Do you need immediate income from the property portfolio, or are you focused on long-term wealth accumulation and reinvestment? Your requirement for present cash flow versus future capital growth will heavily influence distribution decisions. Secondly, your **overall personal income and tax position** must be assessed comprehensively. This includes income from employment, other investments, and any other businesses. Understanding which tax brackets your income falls into will determine the most tax-efficient way to extract profits. For example, a basic rate taxpayer has different considerations than an additional rate taxpayer. Remember that from April 2027, basic rate income tax will be 22%, higher rate 42%, and additional rate 47%, which could further impact future decisions. Thirdly, consider the **company's financial health and future plans**. Does the company have sufficient retained earnings to fund future property acquisitions or significant refurbishments without external borrowing? Excessive profit extraction could hinder the company's growth potential. Maintaining healthy cash reserves within the company provides stability and flexibility. Finally, seeking **professional advice from an accountant specialising in property companies** is indispensable. Tax legislation, including Corporation Tax rates, dividend allowances, and potential changes to income tax rates from April 2027, is complex and frequently updated. An accountant can model different profit extraction scenarios, advise on the optimal salary/dividend split, and ensure compliance with all HMRC regulations. They can also provide guidance on the nuances of Capital Gains Tax if you plan to sell property from the company or liquidate the company in the future, particularly considering the annual exempt amount has been reduced to £3,000 for residential property CGT from 2026/27. This ensures your strategies are not only tax-efficient but also legally sound and aligned with your broader financial objectives.

Steven's Take

Okay, let's cut to the chase on Section 24 and limited companies. This is where a lot of misunderstandings happen, so listen closely. First off, a huge benefit of operating your portfolio through a limited company is that **Section 24 does not apply to the company itself**. This is a fundamental point. Your company can still deduct 100% of its mortgage interest and other finance costs before calculating its profits, which are then subject to Corporation Tax. This is a massive advantage compared to an individual landlord who only gets a 20% tax credit. Now, where it *does* become relevant to your personal tax liability is when you, as the director, extract money from that company. That's your personal income, and it will be taxed. From my own journey, moving properties into a company structure was a game-changer for scaling up. I quickly realised that while the company saves on tax, careful planning is needed for personal drawings. With the Bank of England base rate at 4.75% right now, and BTL mortgage rates typically between 5.0-6.5%, that full interest deductibility in a company is more valuable than ever. You really want to maximise what stays in the company or how you take it out. The strategies for extracting profits are critical here, especially if you have other income. You're looking to minimise your personal income tax. With the annual exempt amount for Capital Gains Tax now at £3,000, you want to be smart about how you structure any sales, too. Don't just blindly pull out all the profits; think about your overall financial picture and how dividends, salaries, or even director's loans fit in. Using retained profits to expand your portfolio further within the company is often the most tax-efficient route, delaying personal tax liability until you truly need the funds.

What You Can Do Next

Review your company's financial statements: Understand the actual profits generated by your portfolio after deducting all allowable expenses, including mortgage interest, which means 100% of it, unlike an individual landlord.
Consult with a tax advisor specialising in property: Before extracting any funds, get professional advice on the most tax-efficient methods for *your specific circumstances*, considering your other income sources. They can help you model different scenarios for dividends, salaries, and director's loans.
Categorise company expenses accurately: Ensure all legitimate company expenses, including BTL mortgage interest at 5.0-6.5% for two-year fixed rates, are correctly recorded to minimise the company's taxable profit and thus its Corporation Tax liability (19% for profits under £50k, 25% for over £250k).
Strategically plan profit extraction: If your other income pushes you into higher tax brackets, consider taking smaller dividends, utilising director's loans carefully, or retaining profits within the company for future property acquisitions or refinancing. Remember, Section 21 is due to be abolished, so retaining profits for potential property improvements is also wise.
Consider leaving profits within the company: Reinvesting profits back into the company for portfolio growth, such as buying more properties or refurbishing existing ones to meet at least an EPC C rating by 2030, is often the most tax-efficient long-term strategy as it delays personal tax events.
Understand Capital Gains Tax on company sale: Be aware that when you eventually sell the company or its properties, CGT applies to you personally on the proceeds you extract, not the company. Current CGT rates for residential property are 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers, with an annual exempt amount of £3,000.

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