HMRC is increasing people's Personal Tax-Free Allowance to over £16,000 with one rule. You can earn up to £7,500 in rental income a year, without having to pay tax, thanks to the Rent a Room scheme.
If you are letting out a room jointly with someone, you can earn £3,750 tax-free a year each. That would take your Personal Tax Free Allowance to a cool £16,320.
You can let out a room or part of your main property, although the tax relief does not apply to a self-contained flat or annexe. The room must also be furnished. You can also use it if you run a B&B or guest house, so long as it’s in the same property you live in.
Who Can Benefit?
The scheme is available to people that own their home, as well as people who are renting. If you own your home, you should check you're allowed to rent out a room by contacting your mortgage lender and your home insurance provider. If you rent your house, you will need to speak to your landlord to get their permission.
If your rental income is below £7,500, then you don't need to report this money, as it is tax-free. But if your rental income exceeds this amount, you must complete a self-assessment tax return. You can then choose to opt into the scheme on your tax return form. This would exempt you from paying tax on the first £7,500 of your rental income - but anything above this amount would be subject to tax.
Boarders vs Sub-Tenants
If the person is getting a room and food, they are considered to be a boarder. In this case, the first £20 of rental income a week is disregarded along with half of the remaining rent you receive. If you are providing a room only, your renter is classified as a sub-tenant. The first £20 of your rental income a week is disregarded, and the rest is seen as income.
Other Considerations
There are other things to take into consideration. For example, if you were living alone, then you would qualify for a 25% council tax discount. This discount would end if you take on a lodger. You also can’t claim any expenses through the Rent a Room scheme. That means costs like repairs, maintenance, cleaning, or replacing a broken boiler come out of your own pocket.
