Could you benefit from the Rent a Room scheme? 

Do you have a spare room in your home? Maybe your kids have grown up and have moved out? Or, you’ve moved into a new property and you find you have spare space? 

Instead, of converting this space into a home gym that you’ll never use or using the room as a storage space, with the rent-a-room scheme you could earn up to £7,500 per year tax-free. 

What is the rent-a-room scheme? 

Rent-a-room is an opt-in scheme which is available to property owners and tenants. By renting out furnished accommodation in your main home to a lodger you could earn up to £7,500 (or £3,750 if you’re letting with someone else) a year, tax-free. 

The scheme is open to homeowners and tenants – as long as you have permission from the landlord. If you are the property owner, you may have to get permission from your mortgage provider and home insurance provider before renting out a room. 

What can I earn? 

What you charge the lodger for renting the space is entirely up to you, but if it is more than £7,500 (rent-a-room tax threshold) a year you will have to pay tax. This threshold includes everything you charge the lodger as part of the rental service. So, if you charge for meals, cleaning or laundry you’ll have to include these as well.  

Tax and the rent-a-room scheme

If you earn less than the rent-a-room tax threshold (£7,500) your tax exemption is automatic, and you don’t need to do anything except keep a record of the income. 

If you earn more than £7,500 you will have to complete a tax return. You’ll need to do this, even if you don’t normally have to. You can choose to do one of two things:

1. Opt-in to the scheme and inform HMRC of this by completing the appropriate section of your tax return and claim your tax-free allowance. Using this method, you’ll pay tax on the gross income after the allowance (£7,500) has been deducted. 
2. Choose not to opt-in and record your income and any related expenses on the property pages of your tax return. Using this approach, you’ll pay tax on any profit you’ve made (income minus allowable expenses). 

Unless you inform HMRC, they’ll assume that you’re opting out of the scheme, so it’s important that you inform them through your tax return. 

If you decide to opt-in, you aren’t tied to that option forever. You can choose a different option each year, but you must tell HMRC by the 31st January following the end of the tax year. 

Pros and cons of the rent-a-room scheme 

The benefits of opting-in to the scheme include: 

• Additional income of £7,500 per year tax-free if your earnings are under the rent-a-room tax threshold
• The income from the scheme can help towards the costs of running a home
• It’s company for you if you live on your own

Some things to consider before opting-in to the scheme: 

• The income you earn through the rent-a-room scheme may affect your means-tested benefits (if you are entitled to them), like universal credit
• You need permission from your landlord, or if you’re a homeowner your mortgage and insurance provider – they could say ‘No’ 
• As you can’t claim for expenses relating to the property, such as wear-and-tear, or the cost of replacing a boiler, you could be financially worse off by opting-in to the scheme
• Even if you opt-in to the scheme you must keep accurate records, in case you choose to opt-out at a later date 

If you’re interested in the rent-a-room scheme but are concerned about the effect it will have on the tax you pay as an independent contractor, our Directors will be happy to answer any of your questions. Call us on 01962 867550 or send us a message using our online enquiry form and we’ll be in touch.