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Rent a Room Relief

Rent a room relief is an optional scheme that lets you receive up to £7,500 in rent each year from a lodger, tax-free. However, this only applies if you rent out furnished accommodation in your own home.

If it is a shared property you can only claim £3,750 each. This is reduced proportionally according to the amount of people owning the home. 

You need to live in the property to get rent a room allowance - so even if you own the home, if you don't live there, you won't be able to benefit from it.

How it all works

In order to qualify you must offer fully furnished accommodation in your main home - you're not allowed to let out space as offices or for other business purposes. 

You don't need to own the property to qualify, but if you rent you'll need your landlord's permission to sub-let. 

If you're letting your own home, you'll need permission from your mortgage provider. 

In either case you will need to get permission from your home insurer. 

How much can I earn?

Individuals can make up to £7,500, but if you the share income from the property with someone else, you can only claim up to £3,750 each. 

The income limit covers everything you charge your tenants as part of the rental service. If you charge them for cleaning, meals or laundry you'll need to count these fees too. 

It means that if you use the rent-a-room scheme, you won't be able to deduct any expenses from your rental income. 

Relief income under £7,500

If your lodger pays less than £7,500 you'll be automatically exempt from tax for this income, and you don't need to do anything except keep a record of the income. 

If you want to, you can opt-out of the scheme, and choose to have this rental income taxed under the normal rules, and pay tax on the difference between your rental income and your rental expenses.

Can I opt out of the scheme?

If you want to opt you will need to inform HMRC by 31 January after the end of the tax year in question. 

You can do this by writing to HMRC or through the property section of your tax return.  

You'll need to opt-out of the scheme each time you submit a tax return. 

Income in excess of £7,500

If you receive more than £7,500 from a lodger you'll need to complete a tax return. 

When completing the property section of your return, you can decide how you'd like this income to be taxed, either by: 

  • Paying tax on your profits in the normal way for a rental business (by paying tax on your actual profit after deducting expenses)
  • Taking £7,500 tax free (£3,750 if you're one of a couple), and then pay income tax on any excess rent

Claiming the relief vs. paying tax on your rental profits

Unless you inform HMRC otherwise the assumption is that you are going to opt for method A, and your rental income will be taxed under the normal rules. 

If you choose method B, you'll basically forfeit the right to claim expenses, but you'll have an extra £7,500 tax-free allowance. As a rule of thumb, you'll be better off opting for this approach if your expenses are less than £7,500. 

Can I change methods?

You can choose to change methods from year to year. It’s imperative that each time you change you inform HMRC by 31 January after the end of the tax year. This is noted within the property section of your tax return.  

Rent a room example

John charges his lodger, Carl, £750 a month rent to share his house. As the annual rent of £9,000 is more than the rent-a-room allowance (£7,500) Bill has to decide how to deal with the income.

If he stays in the rent-a-room scheme, over a year £7,500 of Carl’s rent will be tax-free. That leaves £1,500 to be taxed at John’s top rate of tax, which is 20%. So he pays tax of £300 on Ben’s rent for the year.

Rent a room

Calculation

Amount

Rental income

£9,000

Rent-a-room allowance

-£7,500

Taxable income

£1,500

Tax payable = £1,500 x 20%

£300

John could, however, opt out of the rent-a-room scheme and have the whole lot treated as ordinary rental income, which means he can deduct relevant expenses and have only the ‘profit’ taxed.

The expenses John could claim against the rent come to about £2,500 for the year. When deducted from the total rent received, this would leave him with a profit of £6,500 and a larger tax bill of £1,300 (20% of £6,500).

This means it makes more sense for John to stay in the rent a room scheme. 

Rental income

Calculation

Amount

Rental income

£9,000

Deductible expenses

-£2,500

Profit

£6,500

Tax payable = £5,900 x 20%

£1,300

What about 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 use services like Airbnb.

Alternatively, homeowners letting rooms on Airbnb can benefit from a tax-free 'property allowance' of up to £1,000 each tax year. This benefit can't be claimed at the same time as the rent-a-room allowance. This won't be the right option for everyone.

Most homeowners who choose to let a room (up to the maximum 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.