What is the Rent a Room scheme?
If you have a spare room in your house, you could be sitting on a tax-free nest egg. Many more people each year are making a Lodger Agreement and taking in a lodger. And they can earn up to £7,500 a year tax-free income (or £3,250 if you’re letting jointly). This is known as the Rent a Room scheme. Find out more about the Rent a Room scheme…
The Rent a Room scheme is a tax-break. A tax-break for renting a room. It means that you don’t have to pay tax on any income that you get from renting a room in your house. It’s referred to, officially, as an ‘optional exemption scheme for income from renting furnished accommodation in your only (or main) home. To you and I it’s an easy way to earn some extra cash by taking in a lodger.
Who can benefit from the Rent a Room scheme?
You can benefit from the Rent a Room scheme if you let furnished accommodation in your only or family home to a lodger.
- Your only or family home is defined as the one where you/your family live for most of the time.
- A lodger is defined as someone who pays to live in your home, sometimes with meals provided, and who often shares the family rooms.
- A lodger can occupy a single room or an entire floor of your home.
- However, the Rent a Room scheme does not apply if your home has been converted into separate flats that you rent out. This makes it an for which there are different rules. If this is the case, you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax through Self-Assessment.
- Note that the Rent a Room scheme specifically covers furnished rentals. The Rent a Room scheme doesn’t cover unfurnished lodger rentals.
If you share a home and both want to rent a room, you still can do so under the Rent a Room scheme.
If you are both renting furnished accommodation in your joint home, you will each be entitled to receive half of the allowance (i.e. up to £3,250 for the 2020/21 tax year) without paying tax.
If you provide meals and laundry services, you can still benefit from the Rent a Room scheme.
If you charge for additional services, you will need to add the payments you receive to the rent, to work out the total receipts. These are calculated as income that counts toward your £7,500 tax-free limit. If you get more than £7,500 a year in total, you will have to pay tax by completing a Self-Assessment Tax Return, even if the rent is less than that.
If you run a business, you can benefit from the Rent a Room scheme.
If you run a B&B or a guest house, or if you provide meals or cleaning services as part of your rentals, you can still join the Rent a Room scheme. You simply need to complete the relevant parts of the self-employment pages of your Self Assessment tax return.
Even if you don’t own your own home, you can benefit from the Rent a Room scheme!
You can benefit from the Rent a Room scheme whether you are a home owner or you are renting your home. However, if you are renting, you will need to check that your lease allows you to take in a lodger.
Is the Rent a Room scheme for you?
You should always check with your current mortgage provider and insurance provider before you rent a room and start making that Lodger Agreement. Make sure that your current arrangements are OK, and remember that they are not set in stone. You can change them (or your provider) if you want to!
On the face of it, everyone wants tax-free income. So who wouldn’t opt in to the scheme? But, as with all tax-breaks, there are pros and cons. And there are some simple sums you can do now to find out what is right for you.
If you are in the Rent a Room scheme, you can’t claim any expenses relating to your lodger letting. These may be things like repairs to the property, wear and tear, insurance, heating and lighting, etc.
To work out whether you will be better off joining the Rent a Room scheme or declaring all of your rental income and claiming expenses on your tax return, you need to compare:
- How much rental income you are left with after your expenses (your profit) with…
- The amount of your receipts (rent plus any income from laundry services, meals, etc.) over £7,500 or £3,250 if you’re letting jointly (2020/21 tax year)
By not joining the scheme, you will be paying income tax on 1. If you join the scheme, you will pay tax on 2. The figures will either add up or not!
How to join the Rent a Room scheme
If you don’t normally receive a tax return and your receipts are below the tax-free thresholds for the scheme, the tax exemption is automatic so you don’t need to do anything. There is no need to tell anyone unless you go over the magic £7,500 figure (or £3,250 if you’re letting jointly).
But if you wish to join the scheme and your receipts are above the tax-free threshold, you must tell HMRC – you can do this by filling in Self-Assessment tax return and claiming the allowance.
- Seven steps to screening and selecting your lodger
- Lodgers: useful tips for beginner landlords
- Top tips for taking in a lodger