If you have a spare room and are looking to make some extra money, the Rent a Room Scheme could be a perfect fit.
By letting out a room in your house, you could earn up to £7,500 tax-free each year (or £3,250 if you’re letting jointly). Provided you don’t mind the extra company, taking in a lodger can be a great way to earn additional income.
What is Rent a Room?
In 1992, the Rent a Room Scheme was introduced by the UK government in a bid to encourage people to let out their spare rooms and increase the supply of low-cost rental accommodation. In return, the scheme offers recipients / participants an incentive to earn up to £7,500 tax-free per year.
Since plans to restrict the relief for recipients through a shared occupancy test were scrapped in the Finance Bill 2018/19, it is still possible for Airbnb-type lets and bed and breakfasts to benefit.
Do I qualify?
In order to qualify, the accommodation accepting a lodger must be let furnished in the landlord’s name. It does not matter whether the home is owned or rented, but for rented properties the landlord’s permission is required.
Where more than one person benefits from the income, the tax-free limit is halved to £3,250, regardless of how many people share the income.
The relief
Any rental income that is up to the scheme’s limit is tax-free and does not need to be reported to HMRC. However, where the rental income is more, the landlord has a choice:
- To work out rental profit in the usual way by deducting expenses from the rental income;
- Or to deduct the rent-a-room limit from the rental income and pay tax on the difference.
Using the Rent a Room scheme limit is beneficial in the event there is more than actual expenses. When this route is taken, the relief should be claimed on the self-assessment tax return by ticking the appropriate box.
Take a look at the following case studies to get a better idea of how the scheme’s relief works in action:
Case Study 1
John is single and has a two-bedroom house. He lets out his spare room for £400 a month and qualifies for rent-a-room relief. As his rental income of £4,800 is less than the rent-a-room limit, he does not need to declare it to HMRC.
Case Study 2
Rob and Fiona are keen hikers who like to get away each weekend in the summer. They let out their Brighton flat via Airbnb while they are away. In 2018/19 they earned rental income £6,000, which they shared equally.
As Rob and Fiona shared the income, they each had a rent-a-room limit of £3,750. As the rental income from letting out the flat (£3,000 each) is less than their rent-a-room limit, they are eligible for rent-a-room relief and also do not need to report the income to HMRC.
Case Study 3
Julie runs a bed and breakfast in Cheltenham. In 2018/19, she received rental income of £12,000 and her expenses were £3,000.
Due to the fact her rental income was more than £7,500, she had to report it to HMRC. However, she was still able to benefit from rent-a-room relief by opting to work out her profit by deducting the rent-a-room limit of £7,500, rather than actual costs of £3,000.
As a result, her taxable profit was only £4,500, rather than £9,000 (which would be the profit in the absence of rent-a-room relief). By claiming the relief, she would have saved tax of £900 if she was a basic rate taxpayer and £1,800 tax if she was a higher rate taxpayer.
Taking in a lodger
According to Matt Hutchinson, a director at SpareRoom, there are over 19 million empty bedrooms in owner-occupied properties in England alone!
Whilst the idea of allowing a stranger into your home may be daunting, renting out a spare room brings extra money and provides an opportunity for companionship (plus there’ll be one more person to share the chores with!)
Another point to note is that in the unfortunate event that things do go wrong, unlike tenants, lodgers are ‘excluded occupiers’, which means they can be evicted without having to go to court.
