How rental income tax works – and why Section 24 matters
1. The Basics: How Does Rental Income Tax Work in the UK?
Anyone renting out a property in the United Kingdom must pay tax on their rental profit.
This profit is calculated by subtracting expenses such as maintenance, insurance, and management costs from your rental income.
You then pay Income Tax on what remains.
Until 2017, landlords were allowed to fully deduct their mortgage interest. This meant only the actual profit was taxed — similar to what Dutch investors are used to.
2. What Changed with Section 24?
With Section 24 of the Finance Act 2015, the UK government abolished the mortgage interest deduction.
The goal was to make the housing market fairer between homeowners and landlords.
Since 2020, private landlords must pay tax on gross rental profits — before mortgage interest.
After that, they only receive a 20% tax credit on the interest paid.
For higher-rate taxpayers (40% or 45%), this results in a substantial increase in the overall tax burden.
3. Who Pays Which Tax?
Private Landlords (in their own name)
As a Dutch national owning property in the UK, you fall under UK Income Tax.
Tax rates for 2024 / 2025:
| Tax Band | Annual Income | Rate |
| Personal Allowance | up to £12,570 | 0% |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | above £125,140 | 45% |
The first £12,570 is tax-free (the personal allowance), provided you are UK tax-resident for your rental income.
4. Example (Personal Ownership)
You receive £20,000 in rent, pay £8,000 in interest, and £2,000 in other costs.
- Taxable income before interest: £18,000
- Income tax at 20%: £3,600
- Section 24 tax credit: 20% × £8,000 = £1,600
- Net tax: £3,600 – £1,600 = £2,000
For basic-rate taxpayers, the change has little effect, but for higher earners, taxes are significantly higher than before 2015.
5. Investing Through a UK Limited Company
A Limited Company (Ltd) pays Corporation Tax on its profits after deducting all expenses, including interest.
A company has no tax-free allowance; profits are taxable from the first pound.
| Annual Profit | Corporation Tax Rate |
| Up to £50,000 | 19% |
| £50,001 – £250,000 | Marginal rate (rising) |
| Above £250,000 | 25% |
All mortgage interest is fully deductible.
You only pay Dividend Tax (8.75%–39.35%) if you withdraw profits, but many investors reinvest profits into new projects.
| Structure | Allowance | Tax From | Key Note |
| Private (individual) | £12,570 | Above that amount | Section 24 applies |
| Ltd (company) | None | From £1 profit | Interest fully deductible |
6. The Netherlands–UK Double Taxation Treaty
The treaty prevents double taxation:
- The UK taxes income from UK property.
- The Netherlands grants an exemption (with progression), meaning the income affects your overall rate but is not taxed again.
In the Netherlands, UK property typically falls under Box 3 (assets), which often reduces the overall advantage of a small portfolio.
7. Cash Flow Impact of Section 24
Because Section 24 taxes gross rental income, your net cash flow can drop significantly.
In a Ltd structure, the process is fairer: you first deduct costs and interest, then pay tax on what’s left.
That’s why more and more foreign investors are choosing a Ltd structure or investing through experienced partners in established projects.
8. Summary by Structure
| Situation | Type of Tax | Tax Base | Rate | Key Point |
| Private (NL investor) | Income Tax (UK) | Rent before interest (20% credit) | 20–45% | Section 24 limits interest deduction |
| Ltd (UK company) | Corporation Tax (UK) | Profit after interest | 19–25% | Interest fully deductible |
| Dividend distribution | Dividend Tax | Distributed profit | 8.75–39.35% | Reinvesting avoids extra tax |
| Dutch return | Box 3 / exemption | Assets | Depends on treaty | No double taxation |
9. Conclusion: Small Portfolios Rarely Attractive
For Dutch investors owning one or two UK rental properties, the tax benefit is usually limited.
Your property is taxed in Box 3 in the Netherlands, while you also pay UK income tax, which is higher due to Section 24.
The result: lower-than-expected net returns.
A better alternative is to:
- Build your own portfolio through a UK Limited Company, where interest remains fully deductible and profits can be efficiently reinvested; or
- Partner with an experienced investor or developer to earn passive returns — often up to 10% per year — without handling the tax and operational complexities yourself.
This way, you can take advantage of opportunities in the UK property market without getting trapped by complicated tax rules.
Disclaimer
This text is intended solely for informational and educational purposes.
We are not tax advisers or financial planners.
The content is based on the real-world experiences of international investors and should not be regarded as personal financial advice.
