Accounting for Mortgage Interest with Residential Rental Income

Accounting for Mortgage Interest with Residential Rental Income

You probably already know that owning a rental property can be a lucrative investment, but it also comes with its set of financial responsibilities and reporting requirements. One of the significant expenses associated with owning a rental property is mortgage interest. Here’s a brief overview of how mortgage interest is accounted for with residential rental income in the UK.

  1. The Basics

When you receive rental income from a property, it is considered taxable income. However, not all the money you receive goes straight into your pocket. You’ll have expenses – and one of the largest of these is often the interest you pay on a mortgage if the property is mortgaged. Just remember that the repayments are not all considered in the below, it’s only the interest element of the repayments.

  1. Tax Relief Changes

Historically, landlords could deduct all their mortgage interest from their rental income before calculating their tax bill. However, from the tax year 2017/18 onwards, the UK government introduced changes to the way landlords can claim mortgage interest tax relief.

By the 2020/21 tax year, landlords could no longer deduct their mortgage expenses from their rental income before calculating their tax liability. Instead, they receive a tax-credit, based on 20% (the current basic rate of tax) of their mortgage interest payments.

  1. How it Works Now

Let’s break down the current process:

– First, calculate your total rental income for the tax year.

– Deduct allowable expenses (but excluding mortgage interest).

– The result is your taxable rental income.

– Calculate the tax due on this amount at your marginal rate.

– Deduct a basic rate tax credit for your mortgage interest from the tax due.

For higher-rate taxpayers, this change effectively means you’ll be paying tax on a higher portion of your rental income, leading to a higher tax bill, even if your profit remains unchanged.

  1. Record Keeping

It’s crucial for landlords to keep diligent records of all rental income and associated expenses, including mortgage interest. These records will be vital when completing your Self Assessment tax return and ensuring you claim the correct amount of tax relief.

  1. Consider Professional Advice

The changes to tax relief on mortgage interest can be complex, especially if you have multiple properties or other sources of income. It may be beneficial to seek advice from us at Harrisons Accountancy to ensure you’re compliant and making the most of any available reliefs.

  1. Other Considerations

Don’t forget to consider if this affects any of your other benefits, for example free childcare/child benefit & your tax bands.


Accounting for mortgage interest in the context of residential rental income has become more complicated due to recent tax changes. While it’s essential to understand the basics, always consider seeking help from Harrisons Accountancy to navigate the rental income field effectively.

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