How the rent-a-room relief works
In a nutshell, the rent-a-room scheme lets you receive up to £7,500 a year from a lodger before you need to start paying tax on the income.
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 insurance provider.
How much can I earn under 'rent-a-room relief'?
Individuals can make up to £7,500, but if you 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.
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 out 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.
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.
- Get a head start on your 2020-21 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
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|
|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.
|Tax payable = £5,900 x 20%||£1,180|
Can I claim the rent-a-room allowance on Airbnb rentals?
At the moment, 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.
Alternatively, homeowners letting rooms on Airbnb can benefit from a tax free 'property allowance' of up to £1,000 each tax year. This benefit can't be claimed at the same time as the rent-a-room allowance, though, so it won't be the right option for everyone.
Most homeowners who choose to let a room (up to the maximum 90 days a year) are likely to find the rent-a-room scheme more beneficial, while the property allowance could be a useful alternative for people letting out other assets such as parking spaces or driveways.