How to use the Rent-a-room scheme to save tax

 

If you already have a lodger or are thinking about letting furnished rooms in your home, you can receive up to £7,500 a year tax-free (£3,750 if letting jointly). This is known as the Rent-a-Room scheme and in this article, we'll explain how you can take advantage of it and when it may not be beneficial.

What is the Rent-a-Room scheme?

The Rent-a-Room scheme is an optional scheme that lets you receive a certain amount of income from lodgers tax-free.

How does the Rent-a-Room scheme work?

To take advantage of the scheme, anyone who is renting furnished accommodation in their main or family home should complete the relevant tax forms.

Who can take advantage of the 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/your family live for most of the time. A lodger is someone who pays to live in your home. The rent and cost of meals and services that you may provide can all count towards the scheme that allows you to earn up to £7,500 tax free.

A lodger can occupy a single room or an entire floor of your home. However, the scheme does not apply if your home is converted into separate flats that you rent out. In this case, you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax in the normal way. Nor does the scheme apply if you let unfurnished accommodation in your home. The rented space cannot be used for business purposes but your lodger may use it to work in the evening or weekends or to study if they are a student.

Will the rent-a-room scheme save you tax?

The main benefit is the tax saving you receive using the tax-free allowance if you are able to meet the criteria to qualify for the rent-a-room scheme. The rent-a-room scheme will allow you to save tax on up to £7,500 of income that you earn from qualifying rental income.

However, the scheme has advantages and disadvantages - it's simply a matter of working out what is best for you.

The principal point 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 such as wear and tear, insurance costs, repairs, heating and lighting.

To determine whether you will be better off joining the scheme or declaring all of your letting income and claiming expenses on your tax return you will need to calculate the difference in tax due each way before making your decision. Below we have presented two examples - one that would benefit from using the rent-a-room scheme and the other would not.

Example 1

For example, if you earned £10,000 in rental income and incurred expenses of £3,000, you would pay tax on the difference of £7,000. If you use the rent-a-room scheme, you would not be able to offset the expenses you incurred but you would be able to use the £7,500 tax allowance so you would pay tax on £2,500. In this situation, you would benefit from using the rent-a-room scheme.

Example 2

If you earned £10,000 in rental income and incurred expenses of £8,500, you only pay tax on £1,500. The rent-a-room scheme would not be beneficial in this instance because you would not be able to offset your expenses and the allowance from the scheme would only offset £7,500 from your income leaving you to pay tax on £2,500 of your rental income.

The scheme is one that only applies if you opt into it so you don't have to worry about it if you work out that you would be better off not using the scheme.

Further reading

Rent a room scheme guidance

Help with your self-assessment tax return