Mortgage interest relief

lukekelly19

I'm struggling to understand what I think must be a quite basic point. In HMRC's guidance on tax for rental income, it says there is tax relief on the interest payment for the mortage (and not the capital payment. This is phrased as a 'tax credit', 'tax relief' or 'tax reduction'. However, I am not very financially litererate so I don't really understand what this means.

Is it any of the following?

a) only pay 20% tax on the interest [If the interest payments are £5000, and I pay tax at 40% from my job that would be: =5000*0.2 = 1000 tax]
b) only pay tax on 20% of the interest [=(5000*0.2)*0.4= 400 tax)
c) don’t pay tax on 20% of the interest [=(5000-(5000*0.2))*0.4 = 1600]

Hoenir

Ignoring other deductible expenses. If your net rental income is £10,000. You'll pay 

1. 20% tax as a basic rate taxpayer in E&W, i.e. £2,000
2. 40% tax as a higher rate taxpayer in E&W, i.e. £4,000

Your mortgage interest is £5,000. For this you'll receive a tax credit @ 20% i.e. £1,000. 

This will leave you with tax liability to pay of 

3. £1,000 as a basic rate taxpayer
4. £3,000 as a higher rate taxpayer

lukekelly19

Hoenir said:

Ignoring other deductible expenses. If your net rental income is £10,000. You'll pay 

1. 20% tax as a basic rate taxpayer in E&W, i.e. £2,000
2. 40% tax as a higher rate taxpayer in E&W, i.e. £4,000

Your mortgage interest is £5,000. For this you'll receive a tax credit @ 20% i.e. £1,000. 

This will leave you with tax liability to pay of 

3. £1,000 as a basic rate taxpayer
4. £3,000 as a higher rate taxpayer

So does 'tax credit' mean that I don't pay tax on 20% of that income (the interest) - so c) in my question?

Hoenir

Yes.On only the interest paid.

400ixl

Given your other thread where the mortgage is on your main residence and not the rental, how is any of this relevant?

You don't have a mortgage on the rental from what you said?

silvercar

400ixl said:

Given your other thread where the mortgage is on your main residence and not the rental, how is any of this relevant?

You don't have a mortgage on the rental from what you said?

It’s the purpose of the loan that counts, not where, or even if, it is secured.