Rent a Room Scheme
The Rent a Room Scheme is an optional scheme, allowing owner occupiers and tenants the opportunity to receive tax-free rental income by renting out their furnished accommodation to a lodger, in your only or main home.
It allows you to earn up to £7,500 a year (the annual rent a room limit for the tax year 2018 to 2019) tax-free. If you are letting jointly with someone else, this figure is reduced to £3,750.
When can I use the scheme?
You are able to use the scheme if:
The room you rent out is furnished
Your letting activity amounts to a trade, such as:
You run a guest house
You run a bed and breakfast business
You provide services, such as meals and cleaning
When am I not able to use the scheme?
You are not able to use the scheme if the room you provide is:
Not part of your main home when you rent it out
Used as an office or for business purposes. You will qualify however, if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities
In your UK home and you are renting it whilst you are living abroad
Opting in and out of the scheme
If the amount you earn from renting out your spare room is less than the £7,500 a year limit (or £3,750 if you are renting it out jointly) the tax exemption is automatic and you don’t have to do anything.
If it's more than the limit you will need to complete a tax return. You are then able to do one of the following:
Let HM Revenue & Customs know you are opting into the scheme, so you can claim your tax-free allowance; or
Choose not to opt in and record your income and any associated expenses on the property pages of your tax return
Paying your tax
If your income from renting out your room is more than the £7,500 limit for the tax year, you will have two options:
Pay tax on your actual profit from renting the room (which is calculated as the total income received minus allowable expenses).
Pay tax on the gross (before tax) income minus the tax-free threshold, but with no allowance for expenses.
If you calculate what your expenses are and if they are larger than the tax-free threshold of £7,500, then you will be better off with the first option. If they are smaller you should opt for the second.
You can change the method from year to year, so long as you inform HM Revenue & Customs.
You must let HMRC know within one year of 31 January following the end of the tax year.
Impact on Benefits
Housing benefit - Depending on how the person you are renting your spare room to, is classified, will determine how any Housing Benefit you receive will be treated. The person you are renting to, will be classified as a boarder or a sub-tenant:
If you are providing a room and prepared food as well, the person you rent your room to, will be known as a boarder.
In this case the first £20 of rental income you receive per week is disregarded along with half of the remaining amount of rent you receive. For example, if the rent is £60 per week, £20 will be automatically disregarded, plus £20 of the remaining £40 rent you receive.
For the purposes of Housing Benefit you will have £20 a week income, which may impact the amount you receive in Housing Benefit.
The person you rent out your spare room to, will be known as a subtenant If you are providing a room only and no meals.
The first £20 of any rental income you receive, per week will still be disregarded, but the remaining amount will be classed as income.For example, if the rent is £60 per week, £20 will be automatically disregarded, but the remaining £40 you receive will be classed as income and could impact on the amount of Housing benefit you are entitled to.
If you are in receipt of Housing Benefit, and you are renting out your only spare room you won’t be affected by the bedroom tax. However if you have more than one spare room, you will be subject to it.
Council Tax reduction
You will no longer be eligible for the single occupier 25% council tax reduction (if you previously qualified) if you rent a room to a lodger.
Income from the rent-a-room scheme will not be counted as income (up to the tax-free allowance of £7,500) for the purposes of Universal Credit.
If you are renting out a spare room, you will be subject to the bedroom tax.
Although you are not able to claim expenses with the rent a room scheme, it is still a good idea to keep detailed records. If you decide to opt out at a later date you may need this information. Visit www.gov.uk/keeping-your-pay-tax-records to read HMRC guide to record keeping.