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Tax on property and rental income

Rent-a-room scheme: Letting a room in your home

By Tom Wilson

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Rent-a-room scheme: Letting a room in your home

Renting out a room in your house can be a good way of making extra money, tax-free. Find out how the rent-a-room relief scheme works in detail.

If you take a lodger into your home, there are special tax breaks that mean you can receive up to £7,500 in rent before you'll start paying tax. 

This guide explains how the so-called 'rent-a-room' scheme works, what you need to do to qualify for it, and when it will or won't be worthwhile. 

Find our more: Landlord responsibilities - our extensive guide will help landlords fulfil their obligations.

How the rent-a-room relief works

To qualify you must offer fully furnished accommodation in your main home - you're not allowed to let out space as offices or for other business purposes. 

You don't need to own the property to qualify, but if you rent you'll need your landlord's permission to sub-let. 

If you're letting your own home, you'll need permission from your mortgage provider. 

In both cases, you need to get permission from your home insurer. 

How much can I earn under with 'rent-a-room relief'?

Individuals can make up to £7,500, but if you the share income from the property with someone else, you can only claim up to £3,750 each. 

The income limit covers everything you charge your tenants as part of the rental service - so if you charge them for cleaning, meals or laundry you'll need to count these fees too. 

It means that if you use the rent-a-room scheme, you won't be able to deduct any expenses from your rental income. 

Find out more: Allowable expenses for landlords

Claiming rent-a-room relief - income under £7,500

If your lodger pays less than £7,500 you'll be automatically exempt from tax for this income, and you don't need to do anything except keep a record of the income. 

If you want to, you can opt-out of the scheme, and choose to have this rental income taxed under the normal rules, and pay tax on the difference between your rental income and your rental expenses

This might work out better, for example, if you've made a loss while letting out the room in your home that you'd like to offset against the rental income from another property. 

How to opt out of the rent-a-room scheme

If you want to opt you you need to tell HMRC by 31 January after the end of the tax year in question. 

You can do this by writing to HMRC or through the property section of your tax return.  

You'll need to opt-out of the scheme each time you submit a tax return. 

What to do if your income exceeds the £7,500 rent-a-room limit

If you receive more than £7,500 from a lodger you'll need to complete a tax return. 

When completing the property section of your return, you can decide how you'd like this income to be taxed, either by: 

  • A: pay tax on your profits in the normal way for a rental business (by paying tax on your actual profit after deducting expenses)
  • B: take £7,500 tax free (£3,750 if you're one of a couple), and then pay income tax on any excess rent

Claiming rent-a-room relief vs paying tax on your rental profits

Unless you tell HMRC otherwise, it assumes you are going to opt for method A, and your rental income will be taxed under the normal rules. 

If you choose method B, you'll basically forfeit the right to claim expenses, but you'll have an extra £7,500 tax free allowance. As a rule of thumb, you'll be better off opting for this approach if your expenses are less than £7,500. 

Changing methods

There’s nothing to stop you changing methods from year to year, but each time you change you must tell HMRC by 31 January after the end of the tax year. This is noted within the property section of your tax return.  

  • Work out how much tax you owe with the jargon-free Which? Tax Calculator. It’s free to use, but there’s a £30 charge for non-members, if they want to submit their return to HMRC through the calculator. 

Rent a room example: Better off with rent-a-room

Bill charges his lodger, Ben, £700 a month rent to share his house. As the annual rent of £8,400 is more than the rent-a-room allowance (£7,500) Bill has to decide how to deal with the income.

If he stays in the rent-a-room scheme, over a year £7,500 of Ben’s rent will be tax-free. That leaves £900 to be taxed at Bill's top rate of tax, which is 20%. So he pays tax of £180 on Ben’s rent for the year.

Rent a room
Calculation Amount
Rental income £8,400
Rent-a-room allowance -£7,500
Taxable income £900
Tax payable = £900 x 20% £180

He could, however, opt out of the rent-a-room scheme and have the whole lot treated as ordinary rental income, which means he can deduct relevant expenses and have only the ‘profit’ taxed.

The expenses Bill could claim against the rent come to about £2,500 for the year. When deducted from the total rent received, this would leave him with a profit of £5,900 and a larger tax bill of £1,180 (20% of £5,900).

This means it makes more sense for Bill to stay in the rent a room scheme. 

 

Rental income
Calculation Amount
Rental income £8,400
Deductible expenses -£2,500
Profit £5,900
Tax payable = £5,900 x 20% £1,180

 

Can I claim the rent-a-room allowance on Airbnb rentals? 

For now, the rent-a-room scheme covers short-term rentals, so you can claim it if you run a bed and breakfast, or use services like Airbnb. 

But that could change under plans being considered by government, which would close the rent-a-room scheme to short-term landlords, and offer them a £1,000 tax-free allowance instead. 

This change was due to go ahead this year, but has been delayed due to the general election. We'll let you know more about it when we do. 

  • Last updated: May 2017
  • Updated by: Tom Wilson
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