Impact of First Year of Phased Reduction of Finance Cost

The first tax year that relief for finance costs will be restricted is 2017 to 2018. This example below shows the withdrawal of 25% of finance cost deduction and given as a basic rate tax reduction.

Jennifer has employment income of £25,000 and rental income from residential property of £11,000 per year. Her mortgage interest is £8,000 per year.

Salary before tax =   £25,000
Property income calculation:  
Rental income =                                                        £11,000
Finance costs (£8,000 x 75%) =                    -£6,000
Other allowable expenses =                              -£500
Property profits =  £4,500 

Total income =                  

 

£29,500

 

Income Tax calculation:  
£11,000 x 0% =                                                          £0
£18,500 x 20% =                                                      £3,700
£0 x 40% =                                                                  £0
Less 20% tax reduction for remaining finance   
costs calculated on 25% of finance   
costs (£8,000 x 25% = £2,000) x 20%                                          -£400
Final Income Tax =       £3,300

Big HouseThe tax reduction is calculated as 20% of the lower of:

  • finance costs not deducted (25% of £8,000) = £2,000
  • property profits = £4,500
  • adjusted total income (exceeding Personal Allowance) = £18,500

The lowest amount is finance costs, so £2,000 x 20% = £400 tax reduction.