Taxpayers can effectively increase their Personal Allowance to £20,070 by taking advantage of HMRC's Rent a Room scheme, which allows individuals to earn up to £7,500 per year tax-free from letting out furnished accommodation in their home. This relief can save basic-rate taxpayers up to £1,500 annually and higher-rate taxpayers up to £3,000.
How the Rent a Room Scheme Works
Under the scheme, homeowners and tenants alike can rent out a room—or multiple rooms—in their main residence without paying tax on the first £7,500 of income. The allowance is halved to £3,750 if the income is shared with a joint owner. The property must be furnished, and the scheme also covers bed and breakfast or guest house operations, provided they are run from the same property where the owner lives.
Laura Suter, director of personal finance at AJ Bell, explained: “The government gives a tax break for anyone who rents a room out in their home. Lots of homeowners are looking to do this to generate extra money and try to counteract the rising cost of mortgages. You can make up to £7,500 a year tax-free through rent-a-room relief, which will save you up to £1,500 a year as a basic-rate taxpayer or £3,000 a year if you pay income tax at 40%.”
Eligibility and Conditions
The scheme is not limited to homeowners; tenants renting from a landlord can also sublet a room, provided their lease does not prohibit it. There is no minimum letting period, allowing for short-term or occasional rentals. However, if the property is jointly owned and income is split, each person only gets half the relief.
If earnings from renting a room are below £7,500, no tax return is required. For income above that threshold, a tax return must be filed, and the taxpayer can opt into the scheme to claim the tax-free allowance. Alternatively, they can choose not to use the scheme and instead report income and expenses on the property pages of their tax return.
Official Guidance from the Labour Government
The Labour government states: “The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. The threshold is halved to £3,750 if you share the income with someone else. You can let out as much of your home as you want. The tax exemption is automatic if you earn less than your threshold. Which means you do not need to do anything. You must complete a tax return if you earn more than your threshold. You can then opt into the scheme and claim your tax-free allowance. You do this on your tax return. You can choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.”
Impact on Personal Allowance
Combined with the standard Personal Allowance of £12,570, the Rent a Room relief effectively brings the total tax-free amount to £20,070 for those earning rental income. This provides a significant boost for individuals seeking to offset rising living costs, particularly mortgage payments. The scheme is designed to encourage home-based accommodation and support the rental market.
