The Rent a Room scheme in the UK is a straightforward and potentially lucrative option for homeowners who want to make extra cash by renting out a part of their home. Whether you have a spare bedroom, an attic, or a basement that’s gathering dust, this scheme allows you to take advantage of your space and benefit financially.
In this post, we’ll cover what the Rent a Room scheme is, how it works, and what you need to know to make the most of it. If you’re considering renting out a room in your house, this could be the perfect opportunity, especially if you need a little extra income or want to help reduce your household bills.
Who Can Participate in the Rent a Room Scheme?
The Rent-a-Room scheme is available to both homeowners and tenants who rent out a furnished room to a lodger in their primary residence.
Under this tax relief scheme, you can earn up to £7,500 annually without paying tax or £3,750 if you let jointly.
It’s not necessary for you to be a homeowner to leverage this policy. Even if you’re renting, you can still take part in the scheme as long as your lease allows you to sublet a room.
Opting In or Out of the Scheme
If your rental income is below the £7,500 threshold, you automatically qualify for the tax exemption, and no action is needed.
If you earn more than this amount, you must complete a tax return, even if you don’t usually file one. From there, you can choose one of the following options:
- Opt-in: If you choose to opt into the Rent a Room scheme, you must indicate this on your tax return and claim your tax-free allowance.
- Opt-out: If you don’t want to use the scheme, simply report your income and expenses on the property section of your tax return.
If you don’t usually receive a tax return, you can contact HM Revenue & Customs (HMRC) to request one.
There is no need for a special form to opt out of the scheme. If you earn more than the limit or are already filing a return, you can include your income and expenses as you would normally.
Rent a Room Scheme and Your Benefits
The Rent-a-Room Tax Relief scheme can be a useful way to boost your income and provide accommodation to a lodger. However, it’s important to note that your earnings might affect some of your means-tested benefits.
Universal Credit and the Rent-a-Room Scheme
If you’re claiming Universal Credit, income from renting out a room is not considered up to the £7,500 limit. This makes the scheme a great way to supplement your income without reducing your benefits.
Council Tax Reduction and Rent-a-Room
If you’re receiving the 25% single-person Council Tax Reduction and then rent out a room, you will lose that discount.
Housing Benefit and the Rent-a-Room Scheme
The way renting a room affects your Housing Benefit depends on whether the renter is classified as a boarder or sub-tenant.
- Boarders: If you’re providing food alongside the room, the renter is a boarder. The first £20 of rent per week is disregarded, plus half of the remaining rent. For example, if you charge £50 a week, the first £20 isn’t counted, and you’ll only be considered to earn £15 of the remaining £30.
- Sub-tenants: If you’re just renting the room without meals, the renter is a sub-tenant. The first £20 of income is disregarded, but the rest will be considered income. So, in the same example, you’d have £30 counted as income, which could affect your Housing Benefit.
If you’re on Housing Benefit and rent out your only spare room, you won’t be impacted by the bedroom tax. But if you have multiple rooms available, the bedroom tax could apply.
Other Benefits and the Rent-a-Room Scheme
If you’re receiving other means-tested benefits like Income Support or Pension Credit, your income from renting out a room may also affect these benefits.
Offering Additional Services
If you provide extras such as meals or laundry services to your lodger, the money you receive for these services must be added to your rental income when calculating your total earnings. If your total income exceeds £7,500 in a tax year and your overall income is greater than the personal allowance, you may need to pay tax.
Paying Tax on Your Income
If you make more than £7,500 a year, you’ll need to pay tax on your earnings. You have two options:
- Pay tax based on your actual profit (income minus expenses) – this is standard for a rental business.
- Pay tax on the total income, minus the tax-free £7,500 threshold, without deducting any expenses.
To decide which method is best, compare your expenses to the tax-free threshold. If your expenses exceed £7,500, you’ll benefit from the first option. If not, the second option is better.
You can switch between these methods yearly, as long as you notify HMRC.
Running a Business
If you operate a guest house or B&B or offer services like catering or cleaning, you can still participate in the Rent a Room scheme.
Pros and Cons of the Rent-a-Room Scheme
The main advantage of the scheme is the ability to earn £7,500 tax-free.
However, you cannot deduct any expenses, such as maintenance costs, repairs, or replacing appliances, which might make the scheme less advantageous for some people.
It’s important to assess whether you’d be better off staying in or opting out of the scheme.
Example:
Let’s say Frank rents out a room in his home for £200 a week, bringing in £10,400 a year. If he stays in the Rent a Room scheme, he’ll pay 20% tax on the income above £7,500, resulting in a tax bill of £580.
Alternatively, if he opts out of the scheme, he can deduct £2,000 in expenses, leaving him with £8,400 in taxable income. His tax bill will rise to £1,680, nearly double the amount he’d pay in the scheme. In this case, Frank would benefit from staying in the Rent-a-Room scheme, but if his expenses were higher, opting out might save him money.
The Importance of Record Keeping
It’s essential to keep track of your income & expenses, even if you choose the Rent a Room scheme and can’t claim expenses. If you decide to opt-out later, you’ll need accurate records.
Things to Check Before Taking in a Lodger
Before renting out a room, there are a few checks to perform:
- If you own the property: Ensure your mortgage lender allows you to rent out a room under the terms of your agreement.
- Home insurance: Verify that your policy covers renting out a room.
- If you rent: Check your lease to ensure subletting is permitted.
Before proceeding with the Rent-a-Room scheme, speak with your lender, insurer, or landlord to ensure everything is in order.
Leverage Rent a Room Scheme in the UK with Canaf Ltd.
Are you looking to make the most of the Rent a Room scheme or need expert advice on your tax situation? Cangaf Ltd. accountants can help guide you through the process to ensure that you’re compliant and maximising your benefits. Contact us today to get personalized support and take the stress out of managing your finances!
More links
Rent a Room Scheme – How It Works and Tax Rules – MoneyHelper This guide provides an overview of the Rent a Room Scheme, including eligibility criteria and how to claim tax relief.
Rent a Room Scheme and Tax | Free Guide – Rocket Lawyer UK This article explains the tax implications of the Rent a Room Scheme and offers guidance on how to utilize it effectively.
Rent a Room Scheme – How the Tax Rules Can Work for You – Apari Digital This piece discusses the benefits of the Rent a Room Scheme and provides insights into maximizing its advantages.
What Is Rent-a-Room Relief? – Airbnb Newsroom An explanation of Rent-a-Room relief, particularly relevant for Airbnb hosts, detailing how the scheme works and its benefits.
