By the UKPropertyCalculator team • Published 23 February 2026 • Last reviewed 4 October 2026
A common mistake goes like this. A buyer sees a terrace listed at a "7% yield", buys it, and then spends eighteen months quietly funding it out of salary. Nothing stupid has been done. The gross yield was read off a listing and taken to be the return. It is not even close, and in October 2026 the gap between the two is unusually wide.
This guide works a single property all the way through: entry costs, operating costs, mortgage interest at current buy-to-let pricing, the Section 24 tax calculation done properly including the cap that most guides skip, and then the return on the cash actually committed. At the end I derive the gross yield you need just to stand still, by tax band, because that number turns out to be the only one worth memorising.
Gross rental yield is annual rent divided by purchase price. A £250,000 property at £1,250 a month yields 6.00%. It tells you nothing about whether the property makes money, because it contains no costs at all. Its only honest use is screening: it filters a long list down to a short one.
Net rental yield takes operating costs off the rent first, then divides by price. On the figures below, net yield is 3.39%. That is the same property, measured honestly, and the collapse from 6.00% to 3.39% is most of the story of buy-to-let in 2026.
Cash-on-cash ROI measures the return on the money you actually put in, which with leverage is far less than the purchase price. This is the number that tells you whether the deal was worth doing.
Three calculators on this site do the mechanical parts. The Rental Yield Calculator handles gross and net yield, the BTL Cash Flow Calculator runs the monthly position including tax, and the Stamp Duty Calculator gets the surcharge right, which is where budgets most often break.
I have used Leeds because the data is good and the yields are the sort that still attract buyers. ONS puts the average terraced house in Leeds at £206,000 in July 2026, in a city where prices overall rose 3.8% on the year, with the average terraced rent at £1,157 a month. Our example sits above both, at £250,000 and £1,250, which is roughly what a decent two-bed in a settled area like Headingley or Chapel Allerton looks like. Gross yield 6.00%.
| Item | Amount | Note |
|---|---|---|
| Deposit (25%) | £62,500 | 75% LTV is where buy-to-let pricing stops punishing you |
| Stamp duty, additional property | £15,000 | £2,500 standard plus 5% of the whole price |
| Conveyancing and searches | £1,800 | Freehold house, no lease to review |
| Mortgage arrangement fee | £1,000 | See the warning below |
| Survey (RICS Home Survey Level 2) | £600 | Level 3 on anything pre-1950 |
| Initial works before letting | £2,500 | Decoration, EICR remedials, locks |
| Total cash in | £83,400 |
The stamp duty line is the one people get wrong, and they get it wrong in a specific way. The 5% additional property surcharge applies to the entire purchase price, not to the portion above a threshold. On £250,000 the standard charge is £2,500 (nothing on the first £125,000, 2% on the next £125,000) and the surcharge is a flat £12,500 of the full price. Total £15,000. On a £345,000 property the correct total is £24,500, not the £19,750 you get if you mistakenly apply the surcharge only up to £250,000.
Interest here is the Moneyfacts average five-year fixed buy-to-let rate at 75% loan to value, 5.66% as at 1 August 2026, on an interest-only basis. Interest-only is how the large majority of buy-to-let is written, and it matters for the table below: there is no capital repayment line, so there is also no equity paydown to count as a return.
| Item | Amount | Basis |
|---|---|---|
| Gross rent | £15,000 | £1,250 × 12 |
| Void allowance | −£1,731 | 6 weeks, which is 6/52 of annual rent |
| Rent actually collected | £13,269 | |
| Letting agent, full management | −£1,592 | 12% of rent collected, including VAT |
| Landlord insurance | −£400 | |
| Maintenance and repairs | −£2,500 | 1% of value, the biggest judgement call here |
| Gas safety, EICR, compliance | −£300 | Certificates amortised over their validity |
| Property profit before finance costs | £8,477 | This figure drives the tax |
| Mortgage interest | −£10,612 | £187,500 at 5.66%, interest only |
| Pre-tax cash flow | −£2,136 | −£178 a month |
Net yield, measured conventionally as net operating income over purchase price, is £8,477 on £250,000, so 3.39%. The property is loss-making before any tax is assessed, and it is loss-making because of the interest line alone.
The finance cost restriction in section 24 of the Finance Act 2015 finished phasing in for the 2020-21 tax year. Since then, none of your mortgage interest is deductible from rental income. You instead get a basic rate tax reduction, and HMRC is specific that the reduction is 20% of the lower of three amounts:
Almost every buy-to-let guide I read applies 20% to the interest figure and stops. On a leveraged property in 2026 that is usually wrong, because limit (2) bites first. Here, finance costs are £10,612 and property profits are £8,477, so relief is calculated on £8,477. The £2,136 difference does not vanish: it carries forward to be relieved in a future year when profits are larger.
| Step | Basic rate (20%) | Higher rate (40%) |
|---|---|---|
| Property profit before finance costs | £8,477 | £8,477 |
| Income tax on that profit | £1,695 | £3,391 |
| Section 24 reducer, 20% of £8,477 | −£1,695 | −£1,695 |
| Tax due | £0 | £1,695 |
| Finance costs carried forward | £2,136 | £2,136 |
| Cash flow after tax | −£2,136 | −£3,831 |
Note the shape of that. Where the cap is binding, a higher-rate taxpayer's bill reduces to a clean 20% of property profit, regardless of how large the interest bill is. The tax is assessed on a profit figure that the interest has already consumed. Paying £1,695 to HMRC on an asset that lost £2,136 in cash is not a quirk of my assumptions, it is the designed outcome of the policy.
Budget 2025 gave property income its own set of rates, two percentage points above the equivalent main rates, from the 2027-28 tax year: 22% basic, 42% higher, 47% additional. The detail that matters, and that the headlines missed, is in the HMRC technical note: the Section 24 reducer rises with them, to "the property basic rate", so 22% rather than 20%.
That has three different effects depending on your position, and they are worth knowing before you restructure anything.
| Your position | Effect from April 2027 | Why |
|---|---|---|
| Leveraged, relief capped by property profit | No change | Tax equals profit × (rate − relief rate), and both rise by two points |
| Leveraged, interest smaller than profit | Pay more | Extra cost is 2% of the gap between profit and finance costs |
| Owned mortgage-free | Pay the full two points more | No finance costs, so no offsetting relief increase |
Our Leeds higher-rate landlord is in the first row. At 42% with relief at 22%, the bill is 42% of £8,477 less 22% of £8,477, which is £1,695 again. Identical. The landlord who owns outright and nets £8,477 goes from £3,391 of tax to £3,560. The lesson is slightly counter-intuitive: the 2027 change is hardest on the unleveraged landlord and neutral for the most stretched one.
Most buy-to-let ROI figures you see online are capital growth assumptions wearing a suit. So here is the same property at four different growth rates, with the assumption visible rather than buried. Higher-rate taxpayer, interest-only, £83,400 of cash committed.
| Capital growth assumption | Year 1 capital | Total year 1 return | Cash-on-cash ROI |
|---|---|---|---|
| Flat market, 0% | £0 | −£3,831 | −4.59% |
| England actual, +1.1% (ONS, year to July 2026) | £2,750 | −£1,081 | −1.30% |
| Leeds actual, +3.8% (ONS, year to July 2026) | £9,500 | £5,669 | +6.80% |
| London actual, −3.3% (ONS, year to July 2026) | −£8,250 | −£12,081 | −14.49% |
Three of those four rows are real market outcomes from the twelve months to July 2026, not projections. They sit between −14% and +7% on identical rent, identical costs and identical tax. That spread is the actual risk profile of a leveraged single-property purchase, and it is why I distrust any article that quotes buy-to-let ROI as a single number.
One further correction to a figure that circulates widely, including in an earlier version of this page. If your mortgage is interest-only, you cannot add a "capital repaid" line to the return. There is no capital repayment. If you switch to a repayment mortgage you can, but the monthly payment then rises by the capital element, which has to come out of the cash flow line first. Counting the paydown as a return without counting the payment as a cost roughly doubles the apparent ROI out of thin air.
Run the same cost base backwards and ask what rent makes after-tax cash flow exactly zero. This is a far more useful screening tool than any target ROI, because you can test a listing against it in about five seconds.
| Tax position | Break-even rent | Break-even gross yield |
|---|---|---|
| Basic rate (20%), 2026-27 | £1,479 a month | 7.10% |
| Higher rate (40%), 2026-27 | £1,857 a month | 8.92% |
| Higher rate (42%), from 2027-28 | £1,870 a month | 8.98% |
On a £250,000 house, at 75% loan to value and 5.66% interest, a higher-rate taxpayer needs £1,857 a month to stand still. That is 49% more rent than the £1,250 the property actually commands. Dropping to a 60% loan to value fix, where Moneyfacts had the five-year buy-to-let average at 4.89%, moves the dial, but it also requires another £37,500 of deposit. The sensitivity table below shows which assumptions actually matter.
| Change one assumption | Effect on pre-tax cash flow |
|---|---|
| Interest rate 5.66% to 4.89% | +£1,444 a year |
| Maintenance 1.0% to 0.5% of value | +£1,250 a year |
| Self-manage instead of 12% agent | +£1,592 a year, plus your time |
| Void 6 weeks to 2 weeks | +£1,015 a year |
| Rent up 5% | +£584 a year after void and agent fees |
Self-managing and halving the maintenance allowance gets you to roughly break-even before tax. Both are real levers that real landlords pull. Both also shift risk onto yourself, and the maintenance one is only a saving if the boiler cooperates.
Strip out the mortgage and Section 24 stops mattering, because there are no finance costs to restrict. The same property bought outright costs £250,000 plus £15,000 of stamp duty plus about £4,900 of fees and initial works, so £269,900 of cash. Property profit is the same £8,477.
Set that against a cash savings account, and set the illiquidity, the tenant risk and the capital gains tax on exit against the prospect of growth. The cash purchase is not a bad investment so much as a different one: you are buying a growth asset with a modest income attached, and you should be honest with yourself that the income is the smaller half.
If your model dates from a couple of years ago, it is missing these.
Assured shorthold tenancies and section 21 no-fault evictions ended for the private rented sector in England on 1 May 2026. Existing fixed terms converted to assured periodic tenancies on that date, which means no new section 21 notices and possession only on amended section 8 grounds. For the model, that is a longer and less certain void in a problem tenancy, not a new line item. I would not now run a two-week void allowance on a single property.
Confirmed in the government response of 21 January 2026, with spend capped at £10,000 per property over ten years and estimated average spend around £5,400. On a £250,000 asset, £5,400 is more than two years of the break-even gap calculated above. Our EPC rules guide covers the exemptions and the grants that close this December.
Already live for qualifying income above £50,000 from April 2026, dropping to above £30,000 from April 2027. Qualifying income is trading plus property income, so two modest rentals can pull you in. Budget for software and for quarterly rather than annual bookkeeping.
Council schemes keep arriving and they are local, so they never appear in national cost guides. Croydon's scheme went live on 25 September 2026 at £800 for a five-year licence across 14 wards. Check the specific council before you offer, not after.
A company deducts mortgage interest in full, so the Section 24 problem disappears. The frequently quoted comparison is "25% corporation tax against 40% income tax", and that is wrong in a way that happens to favour the company anyway: the small profits rate is 19% on profits up to £50,000. The 25% main rate only applies above £250,000, with marginal relief in between. A single-property company with £8,477 of profit pays 19%.
The costs on the other side are real. Company buy-to-let mortgages price above personal ones. You pay dividend tax when you extract profit, and the ordinary dividend rate rose to 10.75% from April 2026. There is no capital gains annual exempt amount for a company. Moving an existing personally-held property into a company is a disposal for capital gains tax and a purchase for stamp duty, including the 5% surcharge, so the transfer cost on our Leeds house alone would be £15,000. The structure is worth modelling with an accountant and worth nothing as a reflex.
Run these figures against a property you are actually looking at.
Open the BTL Cash Flow Calculator →Higher yields cluster in the North and the Midlands, which is why our Manchester, Liverpool and Birmingham guides get more traffic than anything we publish about London. The trade is well understood and it has not changed: income in the North, growth in the South, and in 2026 the South has not been delivering the growth either.
On the cost base in this article (a £250,000 house at 75% loan to value, a 5.66% interest-only buy-to-let fix, six weeks of void, 12% agent fees, 1% of value for maintenance), a basic-rate taxpayer breaks even on cash at a gross yield of about 7.1%. A higher-rate taxpayer needs about 8.9%. Those thresholds move with the mortgage rate, so rerun them against your own loan and costs rather than treating them as fixed.
Since 2020-21 you cannot deduct any mortgage interest from rental income. Instead you get a basic rate tax reduction worth 20% of the lower of three figures: your finance costs, your property profits, or your income above the personal allowance. The middle limit catches most leveraged landlords. If your interest bill is larger than your property profit, relief is calculated on the profit and the unused finance costs carry forward to a later year rather than being refunded.
From 6 April 2027 property income gets its own tax rates, two percentage points above the equivalent main rates: 22% basic, 42% higher and 47% additional. The Section 24 tax reducer rises with them, to the property basic rate of 22%. Where your relief is already capped by your property profit the two changes cancel out and your bill is unchanged. Where your finance costs are smaller than your profit, or you own mortgage-free, you pay the full two points more.
A company deducts mortgage interest in full, so Section 24 does not apply, and the small profits rate of corporation tax is 19% on profits up to £50,000 rather than the 25% main rate that applies above £250,000. Against that, company buy-to-let mortgages price higher, you pay tax again when you take money out as dividends, there is no capital gains annual exempt amount, and you carry accounts and filing costs. The structure is a calculation, not a rule of thumb.
5% on top of the standard rates, applied to the whole purchase price, in place since the Autumn Budget of October 2024. On a £250,000 investment property the standard charge is £2,500 and the surcharge adds £12,500, giving £15,000. On £345,000 the total is £24,500. The surcharge applies to the full price and not just to the slice above a threshold, which is the single most common error in buy-to-let budgeting. Use our Stamp Duty Calculator with "additional property" selected.
Worked figures are derived from the stated assumptions using standard arithmetic and are illustrative, not a forecast. Operating cost allowances (void, agent fee, maintenance, insurance, compliance) are market observations rather than published statistics, and the sensitivity table shows how much each one moves the answer.