Rent a room scheme - how does it work?

Renting out a spare room in your home can be a simple way to make some extra money. Best of all, through the government’s rent a room scheme, you could earn up to £7,500 per year tax-free.

Discover how the rent a room scheme works and whether you could be eligible for this tax relief.

What is the rent a room scheme?

The rent a room scheme lets you earn up to £7,500 per year tax-free, when you let out a room in your home to a lodger.

In order to qualify for this government scheme, you have to offer a fully furnished room in your main residence (where you live).

Are there any restrictions on the rent a room scheme?

You will only be able to benefit from the tax-free income the scheme offers if the room is part of your main home. You cannot use the scheme if your home is converted into separate flats.

In addition, you cannot let out space for business purposes, such as offices.

The rent a room scheme is designed for those who would like to rent out a spare room to a lodger. However, those who run a bed and breakfast would also be able to benefit.

Do I need to own a property in order to qualify for the rent a room scheme?

No. Both homeowners and tenants can profit from the £7,500 tax-free allowance. However, if you rent your property you may need to seek permission from your landlord before letting out a room to a lodger.

Homeowners with a mortgage may need permission from their mortgage provider.

It is worth noting here that it is also important to notify your home insurance provider, if you intend to rent out a spare room to a lodger. If you do not do this, you could find that your home insurance becomes invalid.

How much money is it possible to earn through the rent a room scheme?

You can earn up to the threshold of £7,500 per year tax-free. However, if you share the income with your partner (or someone who owns or rents the property with you), this would be halved to £3,750 each.

The threshold is calculated with your gross income from the room rental. So if you charge your lodger for additional services, such as laundry or meals, this will make up part of your earnings.

The rent a room scheme does not allow you to deduct any expenses from your rental income.

What is a resident landlord?

A resident landlord is someone who rents out a furnished room, in their main residence, to a lodger. The lodger has access to living spaces shared with the landlord, such as the kitchen and/or the bathroom.

Resident landlord arrangements are legally very different from other types of tenancy contracts, such as an assured shorthold tenancy. In the case of a resident landlord, the tenant (usually referred to as a lodger), has much more limited rights.

For example, when a lodger lives in your home and you (or a family member) share living space with them, you only have to give them ‘reasonable notice’ to end their contract. This is usually the length of the rental payment period. In addition, it is not necessary to go to court to evict them.

It is highly recommended to sign an appropriate Lodger Licence Agreement before renting out a room. This will detail the terms of the room rental agreement between you and the lodger and will ensure there is no confusion in the future about the type of tenancy agreement you have in place.

How do I claim my tax-free allowance on the rent a room scheme?

If you earn under £7,500, you will be automatically exempt from tax on this income. Make sure you keep a record of all of your receipts.

If you earn more than £7,500, you will need to complete a tax return and opt into the scheme.

In some circumstances, you may decide not to opt into the rent a room scheme (or actively opt out of it). In this case, you would record your income and expenses on your tax return in the property section.

For example, if you have made a loss from letting out a spare room to a lodger and would like to offset this loss against the rental income you have made from another property, it may not be in your interests to opt into the rent a room scheme.

Rent a room scheme example

Mark has a lodger called Margaret. He charges her £800 per month for a furnished room in his home.

As the annual rent paid by Margaret equates to £9,600, which is more than the £7,500 rent a room scheme threshold, Mark must decide whether to opt in or out of the rent a room scheme.

Rental income (£9,600) - rent a room scheme allowance (£7,500) = £2,100 taxable income.

Mark’s top rate of tax is 20%.

£2,100 (taxable income) x 20% = £420 tax payable.

If Mark opted out of the rent a room scheme and treated the income as normal rental income, he would be able to deduct relevant expenses and just be taxed on the profit.

If his expenses come to £3,000 per year, this would give him a profit of £6,600 (£9,600 rental income - £3,000 expenses).

£6,600 x 20% = £1,320 of tax payable.

In this scenario, Mark is better off using the rent a room scheme.

It is highly advisable to work out the figures in your situation, to ensure you are declaring the income from your lodger in the way that would be most beneficial to you.