Renting out a spare room in your home can be a great way to boost your income and under the government’s rent a room scheme, you can earn up to £7,500 a year tax-free.
Here, we explain how the rent a room scheme works and some things you might want to consider before taking in a lodger.
What is the rent a room scheme?
The rent a room scheme is a government initiative that means if you have a spare room, you can rent it out and not pay any tax on the income you get from it, so long as this income doesn’t exceed £7,500.
The average cost of renting a room across the UK is around £580 a month, according to SpareRoom.co.uk, so for the majority of people who are looking to make a bit of extra money by renting their spare room, it’s likely that their income will be less than the £7,500 tax-free allowance.
Although it’s called the ‘rent a room’ scheme, you can rent out more than one room (up to an entire floor) to a lodger if you want to. The bad news if you own your home jointly is that you don’t each get a rent-a-room allowance, instead you have to split it in half.
An important thing to note is that you don’t necessarily need to own the property to use the scheme. If you’re living in a rented property you can also take in a lodger, provided you have permission from your landlord.
How does the rent a room scheme work?
If you rent out a spare room, the rent a room scheme might automatically apply, so long as you meet the following criteria:
You must be living in the UK while you let the room
The room you let out must be furnished
The room must be in the main part of your main home when you let it
The room can’t be used as an office or for any business, although you can still use the scheme if your lodger works in your home in the evening or at weekends, or is a student.
You can also use the scheme if you run a bed and breakfast or a guest house.
If you meet the eligibility criteria and you earn £7,500 or less through your rental income, there is nothing you need to do, the scheme will automatically apply and you can essentially treat this income as a tax-free allowance. One catch is if you already fill out a tax return, you will need to include this rental income on your tax return, but you will still be able to claim it tax-free.
If you earn more than £7,500 in income from renting out your spare room, you will need to fill out a tax return detailing this and then you can either:
Opt into the rent a room scheme, claim your tax-free allowance on your tax return and then pay the additional tax you owe on the remaining profit
Choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.
The amount of tax you need to pay on any profit you make over £7,500 will depend on which income tax bracket you fall into.
So for example, let’s say that you rent out a room for £9,000 a year, but your expenses are £2,000 a year and you pay the 20% basic rate of Income Tax.
Option 1: You opt into the rent a room scheme and so would pay Income Tax on any rent you get that is above the £7,500 limit, which is £1,500. So your tax bill on your rental income would be £300 (20% of £1,500).
Option 2: You opt out of the scheme and so you can claim tax relief for all of your expenses, but you would lose the scheme’s £7,500 tax-free element. This would mean paying 20% Income Tax on £7,000 (the rent of £9,000 minus the expenses of £2,000), which comes to a much higher total of £1,400.
Things to consider before you rent out a room
Before you start advertising your spare room, it’s a good idea to have a think about each of the following points:
1. Make sure you get permission
You don’t have to own the property in order to rent a room to a lodger and it shouldn’t be a problem if you’re renting from a social landlord. However, if you have an assured shorthold tenancy, you’ll need to get permission from the landlord. Whatever you decide to do, make sure you get permission in writing. If you own a leasehold flat, check the lease to make sure there are no clauses forbidding you from renting out a room to a lodger.
2. Check your council tax
If you live in your property on your own, you must tell your local council that you’re no longer entitled to the single occupancy discount. If you rent out a room to a full-time student, they qualify for a discount so effectively aren’t counted.
3. Inform your mortgage lender and insurer
Your mortgage lender shouldn’t object to you renting out a room, but it’s still a good idea to let them know that you’re planning to take in a lodger. You should also notify your home insurance provider. They may insist that you ask your lodger whether or not they have any previous convictions (they can only ask about unspent convictions, not ones that are already spent). This isn’t the kind of question that gets most landlord/lodger relationships off to the best start, but if you ask your lodger to fill in a form and include the question there, it’s likely to seem less intrusive.
4. Think about getting a lodger agreement
It may feel that you know the person well enough not to bother with an agreement, but you might regret it if things go wrong. A lodger agreement will usually include details of exactly what spaces you are renting out, what shared living spaces they will have access to, the term of the tenancy (I.e. are you letting out the room for a fixed term of six months or is it periodic, running from one rental month to the next), if you intend to include any meals in their rental price, rent payment due dates, any additional money they need to pay for bills etc, and any other points you want to note down contractually. You can get lodger agreements online, such as this one from SpareRoom.co.uk which they ask you to pay for at a cost of £7.50 as it has been approved by solicitors for use in England and Wales.
5. Check if it will affect any benefits
If you get any means-tested benefits, then any income you make from renting out your spare room will be counted as income, and your benefits may reduce as a result. You will need to contact the Department for Work and Pensions to let them know that your income has changed and to see whether this will impact your benefits.
How can I advertise my spare room?
You can either advertise your spare room online, for example, through sites such as Spareroom.co.uk or Roomgo.co.uk, or you could place an ad in your local paper. You can list your room free of charge on both these sites, or you can pay a fee to upgrade your advert so that it will appear higher up the results list when people search for accommodation. Bold ads posted by upgraded users receive on average double the enquiries, according to SpareRoom, which charges from £10.99 for an upgrade for seven days, rising to £24.99 for four weeks.
If you don’t fancy the long term commitment of a full-time lodger, you can advertise your room on sites where people are looking for somewhere to stay for the odd night, or who want mid-week accommodation only, such as MondaytoFriday.com, Fivenights.com or Airbnb.co.uk. It’s free to list your room on Airbnb, but when you receive a booking you will be charged a service fee, typically 3% of the amount you’re charging.
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