Rent a Room Scheme

The Rent a Room scheme isn't new, but it is becoming more popular. As bills go up, homeowners are on the hunt for ways to generate extra income. Perhaps you are considering house hacking, or living on your own and looking for some company.

The Rent a Room scheme could be an option to solve those concerns. In this insight, we will cover what you need to know and how to utilise this tax free income.

Key Takeaways

• You can rent a room to a lodger in your home if it is furnished.
• You can earn up to £7,500 tax free annually if you do.
• No tax return is required if you remain under the limit.
• Airbnb is acceptable, but the property has to be your main home, where you live.

What is the Rent a Room scheme?

The Rent a Room scheme lets you rent out a room in your home for tax-free income. You can earn up to £7,500, and if you stay below this limit, no tax return is required

For example, let's say you own a three-bedroom house in London and you decide to rent out one of the bedrooms under the Rent a Room Scheme. You charge your tenant £600 per month, which amounts to £7,200 per year. Since your rental income is below the £7,500 tax-free threshold, you do not need to pay any income tax on the rental income you receive from your tenant. However, if your rental income exceeds £7,500 in a tax year, you will need to pay income tax on the excess amount.

When can you use the scheme?

The scheme can be used if you:

• Rent a furnished room to a lodger
• If you run a guest house, or bed and breakfast.

When can't you use the scheme?

The scheme can not be used if:

• You let out a room that is not in your main home
• You do not let the room out furnished
• If the room is used as an office
• If you let the property whist living abroad

When was the scheme introduced?

In 1992, John Major introduced the Rent a Room scheme to incentivise UK homeowners to let out their spare rooms. The scheme aimed to address the shortage of rental properties at the time by encouraging the creation of more supply

How does the Rent a Room scheme work?

You can earn up to £7,500 by letting out a room in your property, without any further action required. If your rental income exceeds the limit, you'll need to declare it via self-assessment to claim your Rent a Room scheme tax relief. You're free to charge whatever you like for your room and accept a deposit, as long as it's agreed upon upfront with your tenant. You can also accept housing benefit as rent. You're responsible for council tax and should notify your local council if having a tenant means you no longer qualify for a single occupier discount. You may split utility bills proportionately with your tenant. If you plan to end the tenancy, you must serve your tenant a 'notice to quit', providing 4 weeks notice. You and your tenant can end the tenancy at any time by mutual agreement.

What are the Tax Benefits of the Rent a Room Scheme?

You can earn up to £7,500 per year tax free. If you jointly own the property, this limit is split across the owners. You must let HMRC know within a year of 31st January, if you do not intend to claim your tax free benefits. However, no action is required if you do. 

If you earn over the threshold, you need to pay tax. You can do this in two ways:

• Pay tax on the full rental income and include expenses, paying tax only on your profits. Or
• Pay tax on your income above the Rent a Room scheme allowance. You cannot deduct expenses using this method. You will pay your income tax rate on the profits.

You can change methods from year to year.
If you are over the threshold, either option you choose to pay tax, you will still need to register for self-assessment if you do not already do so.

If you are claiming benefits, you will need to check with HMRC how these are impacted. 

Tax benefits Example:

Rent a Room Scheme and AIRBNB

It is allowable to use AIRBNB to rent a room and benefit from the Rent a Room scheme allowance. You must be renting a room that is your home, it must be furnished and you occupy it. When listing your property on AIRBNB, you should list as a Private Room as opposed to a house for rent.

All other rules still apply and you must pay tax if you exceed the threshold.

Do I need a Buy to Let to Rent a Room?

No, Buy to Let mortgages are mot required to rent a room to a lodger. You should check the terms with your provider before agreeing a tenancy as they can differ between lenders. You will also need to review your home insurance as your existing policy could become invalidated.

   FAQs

For further information on the Rent a Room scheme can be found on the Gov.uk website: Rent a Room scheme