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Tax on property and rental income

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

By Ian Robinson

Article 4 of 4

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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.

Using the rent-a-room relief scheme, you can receive up to £7,500 in 2017-18 (the same as 2016-17) gross income each year from lodgers tax-free.

This guide explains how to qualify for rent-a-room relief and whether or not it would be worth your while.

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

Rent-a-room relief

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 £3,750 tax free.

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 you take in a lodger, you must tell your mortgage lender or landlord and your insurer to make sure you aren’t breaching the terms of your mortgage, lease or insurance.

Go further: 30 ways to save on tax - a host of quick money-saving tips.

If your gross income is below the rent-a-room limit

If you earn less than £7,500 you're 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.

Opting out

If you want to opt out, you must tell HMRC by 31 January, 22 months after the end of the tax year. There's 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.

Go further: Tax returns - this guide covers everything you need to know about filling out your tax return.

If your gross income is above the rent-a-room limit

If you receive more than £7,500 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)
  • B: pay tax on your gross income less the £7,500 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're less than £7,500, you’ll be better off with method B.

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


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

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