Tax on property and rental income Rent-a-room: Letting a room in your home
Renting out a room in your house can be a good way of making extra money, tax-free. Rent-a-room relief is a scheme that lets you receive up to £4,250 gross income each year from lodgers tax-free.
To qualify you must let furnished residential accommodation in your only or main home. The relief doesn’t apply to rooms let as an office or for other business purposes.
If you share the income from the same property, you each get up to £2,125 tax free (even if there are more than two of you).
So, for example, three joint owners could claim £6,375 between them.
Anything you charge your tenants for meals, cleaning, laundry and so on must be added to the rent received when you calculate your gross rents, and you can’t deduct expenses.
If your gross income is below the rent-a-room limit
If you earn less than £4,250 (or £2,125) you are automatically exempt from tax under the rent-a-room scheme. But you can opt out and elect to be taxed in the normal way (that is, on your profits from renting out the property) if that suits you better.
For example, if you made a loss on the rent-a-room accommodation you might want to set it against other letting income outside the rent-a-room scheme. If you chose to be taxed under the rent-a-room scheme you couldn’t do this, as losses can’t be created under the scheme.
If you want to opt out, you must tell HMRC by 31 January, 22 months after the end of the tax year. There is no special form for this – you can either put it in writing to HMRC, or make the appropriate entries on your tax return. If you want to remain opted-out you’ll need to do this every year.
If you don’t get a tax return, you don’t need to declare this income.
If your gross income is above the rent-a-room limit
If you receive more than £4,250 (or £2,125) you can choose either to:
- A: pay tax on your profits in the normal way for a rental business (by paying tax on your actual profit after deducting expenses); or
- B: pay tax on your gross income less the £4,250 (or £2,125) limit, with no allowance for expenses.
Method A vs method B
Method A applies automatically unless you tell your tax office that you want method B to apply.
To work out which method is best for you, calculate your expenses. If they are less than £4,250 (or £2,125) you’ll be better off with method B.
There’s nothing to stop you changing methods from year to year but each time you change you must tell HMRC by 31 January, 22 months after the end of the tax year. There isn’t a special form, making appropriate entries on your tax return using one or other method is sufficient.
Example: Better off with rent-a-room
Bill charges his lodger, Ben, £450 a month rent to share his house. As the annual rent of £5,400 is more than the rent-a-room allowance (£4,250) Bill has to decide how to deal with the income.
If he stays in the rent-a-room scheme, over a year £4,250 of Ben’s rent will be tax-free. That leaves £1,150 to be taxed at Bill's top rate of tax, which is 20%. So he pays tax of £230 on Ben’s rent for the year.
|Rent a room|
|Tax payable = £1,150 x 20%||£230|
|Tax payable = £2,900 x 20%||£580|
Tell your lender and insurers
If you take in a lodger, you must tell your mortgage lender or landlord and your to make sure you aren’t breaching the terms of your mortgage, lease or insurance.