If you’re planning to rent a room in your home, you’ll need to know how the tax system works, and how it affects you. If you’re an owner, occupier, or tenant who lets out furnished accommodation to a lodger in your main home, you could be eligible for tax relief on the rental income you receive.
What is the Rent a Room Scheme?
In the UK, the ‘Rent a Room Scheme’ means you can earn up to a threshold of £7,500 per year from letting out furnished accommodation in your home, and not have to pay any tax on your profits. If you share the income with your partner or someone else, this is halved to £3,750. The threshold is the same even if you rent out a room for less than 12 months.
If you don’t already need to complete an annual Self Assessment tax return, then using the Rent a Room scheme involves no paperwork as long as your income from the scheme stays beneath the £7,500 threshold. You should make sure you keep a record of the income you receive, though.
If you’re a limited company director or a sole trader, you’ll usually have to file a Self Assessment each year in any event. So in these cases, you’ll need to declare your full rental income on your tax return.
How does the Rent a Room Scheme work?
If your income from renting a room is less than £7,500 per year, you won’t need to pay any more tax.
If you’re earning more than £7,500 per year from renting a room, you need to complete a tax return (even if you don’t normally) and you have a choice to make over how to calculate and pay any tax due.
You can choose to opt into the Rent a Room scheme – in which case you need to let HMRC know this on your Self Assessment and claim your Tax-free Allowance. If you prefer not to opt in, you simply record your income and any associated expenses on the property pages of your Self Assessment return.
If you opt into the scheme you pay tax on your total (gross) rental income, less the £7,500 threshold (you are not entitled to claim any expenses). If you share the income with a partner or someone else, the threshold to deduct is £3,750.
If you opt out of the scheme, you pay tax on your actual profit from renting out a room. The profit is calculated as the income you receive - less any allowable expenses such as Landlord Insurance, letting agent/marketing fees, or maintenance and repairs. Most rental businesses would use this second option.
To work out which of the two options is best for you, simply calculate what your expenses would be. If the expenses are more than £7,500, you're probably better off not opting into the scheme and declaring all your income and expenses on the property pages of your Self Assessment tax return.
It’s worth mentioning that it may be the case that opting in doesn’t necessarily always result in a healthier financial situation for you. As well as the risk of damage to your property, the receipt of some means-tested benefits (such as housing benefit) can be affected by renting out a room. You can speak to Citizens Advice for more information on how any Housing Benefit or Universal Credit claims may be affected.
You don’t have to stick with a single method each year. You can change year to year, so long as you inform HMRC by 31st January after the end of the tax year in question. You’ll need to let HMRC know whether you're opting in or out of the scheme each year.
Do you need permission to rent out a room?
Most importantly, before renting out a room on your property, you need to check whether you’re allowed to do so in the first place.
You don’t need to actually own the property to be able to use the scheme - if you’re renting (and your own lease allows you to do so), you can rent out a room and claim the tax exemption.
On the other hand, if you’re the owner of the property and have a mortgage, it’s best to check with your mortgage lender to make sure you aren’t breaching any conditions.
Whether you’re an owner or a renter, you’ll also need to check with your home insurance company that your policy allows you to rent a room.
Once you’re sure you’re allowed to rent out a room on your property, now it’s time to think about the Rent a Room Scheme.
Who can and can’t use the Rent a Room Scheme?
You’re able to use the Rent a Room Scheme if:
- you let a furnished room to a lodger
- your letting activity amounts to a trade, for example, if you:
- run a guest house
- run a bed and breakfast business
- provide services, such as meals and cleaning.
You can’t use the Rent a Room Scheme if the accommodation is:
- not part of your main home when you let it
- not furnished
- used as an office or for any business – though you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities
- in your UK home and is let while you live abroad.
Can I claim the Rent a Room allowance on short-term or Airbnb rentals?
Currently, the Rent a Room scheme covers short-term rentals, so you can claim it if you run a bed and breakfast, or if you’re using a service like Airbnb.
Another option, if you’re letting rooms on a short-term basis on Airbnb or similar sites, could be to use the £1,000 property allowance, although you cannot use both the property allowance and the Rent a Room allowance at the same time.
Most homeowners who choose to let a short-term room (up to the maximum of 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.
Get your bookkeeping in order
As ever, it’s important to keep your bookkeeping in good shape, including records of your income and expenses. Even though you cannot claim expenses with the Rent a Room scheme, you might need those records should you decide to opt out later on.
Our handy bookkeeping software Crunch Free helps you keep track of all your incomings and outgoings, allowing you to get on with much less mundane tasks.