If you already have a lodger or are thinking about letting out a furnished room in your home, you can earn up to £4,250 a year tax-free (£2,125 if letting jointly). This is known as the Rent a Room Scheme.
How does the Rent a Room Scheme work?
The Rent a Room Scheme is an optional scheme that lets you receive a certain amount of tax-free ‘gross’ income (i.e. before expenses) from renting out furnished accommodation in your only home, or your main home if you own more than one property.
Who can apply to the Rent a Room Scheme?
You can choose to take advantage of the scheme if you let furnished. accommodation in your only or family home to a lodger. Your only or family home is the one where you and/or your family live for most of the time.
A lodger is classed as someone who pays to live in your home, sometimes with meals provided, and who often shares the family rooms (kitchen, living room etc).
A lodger can occupy a single room or an entire floor of your home, but the Rent a Room Scheme does not apply if your home is converted into separate flats that you rent out – you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax in the normal way if that is your situation.
The Rent a Room Scheme also doesn’t apply if you let out unfurnished accommodation in your home.
Do you have to be a homeowner?
The Rent a Room Scheme is open to everyone, regardless of whether you are a homeowner or are renting from someone else. However, if you are renting, you should check whether your lease allows you to take in a lodger, or you may have a very angry landlord on your hands.
If you’re a homeowner you’ll need to check with your mortgage lender about how taking in a lodger may affect your mortgage loan. Also check with your home insurance provider that you have the correct cover for taking in a lodger.
Sharing a home with a spouse or partner
If you and your spouse or partner are both letting furnished accommodation in your the home you share, you will each be entitled to receive half of the allowance (up to £2,125 for the 2010-11 tax year) without paying tax.
What if you provide meals and laundry services to your lodger (lucky them!)?
If you charge for additional services, you will need to add the payments you receive to the rent, to work out the total receipts. If you get more than £4,250 a year in total, you will have to pay tax, even if the rent is less than that.
The advantages and disadvantages of the Rent a Room Scheme
There are advantages and disadvantages of the scheme – it’s simply a matter of working out what is best for you.
The main thing you have to bear in mind is that if you are in the Rent a Room Scheme you can’t claim any expenses relating to the letting (for example, wear and tear, insurance, repairs, heating and lighting).
To work out whether you will be better off joining the scheme or declaring all of your letting income and claiming expenses on your tax return you need to compare the following:
* how much income you are left with after your expenses
* the amount of your receipts (rent plus any income from laundry services, meals, etc) over £4,250 or £2,125 if letting jointly (2010-11 tax year)
If you opt out of the scheme (or simply do nothing) you will pay income tax on the first amount. If you opt into the scheme you will pay tax on the second amount.
Rent a Room Scheme and running a business
If you run a bed and breakfast business or a guest house, or provide catering and cleaning services as part of a letting business, the Rent a Room Scheme can still apply to you. You will need to complete the relevant parts of the self-employment pages of your Self Assessment tax return.
