You could earn up to £7,500 a year TAX FREE with the Rent a Room scheme
If you’re looking for a way to boost your income while making use of a spare room, the Government’s Rent a Room Scheme could be perfect for you. If you take in a lodger, you could make decent tax-free income from their rent.
What is the Rent a Room Scheme?
The Rent a Room Scheme is an optional scheme open to owner-occupiers or tenants who let out furnished accommodation to a lodger in their main home.
You can earn up to £7,500 a year tax-free, or £3,750 if you’re letting jointly.
This income limit covers everything you charge your tenants for as part of the rental service – so if you charge for cleaning, meals or laundry services you’ll need to count these fees in addition to rent.
You also don’t necessarily need to be a homeowner to take advantage of the scheme: if you’re renting you could also lease out a room to a lodger, if your tenancy agreement allows it.
Opting into the Scheme
If the amount you’re earning in rent is less than the threshold of £7,500 per year (£625 per month), you don’t have to do anything. The tax exemption is automatic.
If your income from having a lodger is higher than £7,500 per year, you must complete a tax return, even if you don’t normally. You can then either opt into the scheme, letting HMRC know this on your tax return and claim your tax-free allowance, or not opt into the scheme, in which case you should just record your income and any associated expenses on the property pages of your tax return.
Advantages and disadvantages of the Rent a Room Scheme
Obviously, the biggest advantage of the scheme is the tax-exemption of any earnings under £7,500.
However, depending on your situation, this may be a disadvantage because you can’t claim any expenses related to the letting.
If you earn more than £7,500 through letting our your room, you’ll need to work out for yourself whether you’ll be better off in or out of the Rent a Room Scheme.
Sarah charges her lodger, Becky, £650 per month to share her home. This adds up to an annual rent of £7,800, so £300 more than the Rent a Room allowance of £7,500.
If Sarah stays in the Rent a Room Scheme, the £300 excess will be taxed at her top rate of tax: let’s say for argument’s sake she’s on the basic rate of 20%. Sarah will pay £60 tax on Becky’s rent for the year.
She could, however, opt out of the Rent a Room Scheme, therefore having the whole lot treated as normal rental income – so she can deduct expenses and only pay tax on the ‘profit’.
Let’s assume that her expenses will total to around £2,500 for the year. When these are deducted from the total rent received, she’ll be left with a profit of £5,300 and therefore a bigger tax bill: 20% of £5,300 is £1,060.
So, in this case, it’s more cost-effective for Sarah to stay in the Rent a Room Scheme.
Things to check before you take in a lodger
If you’re the owner of the property and have a mortgage, you’ll need to check with your mortgage lender that you’re allowed to let out a room under the terms of your mortgage contract.
You’ll also need to check with your home insurer that having a lodger doesn’t conflict with their terms.
If you’re renting your home, you need to ensure that your lease allows you to take in a lodger.
You also need to make sure that the condition of your home is up to standard for taking in a lodger. That means it needs to be clean, in reasonable decorative order, free from vermin and hazards. Furniture must comply with fire safety regulations, and gas safety regulations will also apply. You also need to ensure that the electrical system and any electrical appliances you supply are all safe to use.
If you’re a tenant, your landlord should be doing all these things anyway so you won’t need to do it again. If they’re not, you must contact them straight away.
You are also legally required to check the immigration status of your permanent lodger. You could get a fine of up to £3,000 for taking in a lodger without doing an immigration check. If you take in someone you know or suspect doesn’t have the right to rent, you could get an unlimited fine, or a 5-year prison sentence.
Does the Rent a Room Scheme apply to Airbnb and short lets?
Yes! At the moment, the Scheme applies to short-term rentals, so you can claim it if you run a bed & breakfast or use Airbnb.