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Take advantage of the rent-a-room scheme

28 Sep 2022 | BY Claire Critchley

If you are feeling the pinch and you have a spare room in your home, you may consider renting it out to earn some additional money to help meet your living costs. As university and college terms start, now is a good time to let as students will be looking for accommodation. Even better, the rent-a-room scheme enables you to earn the money you receive from letting the room tax-free.

You cannot use the scheme if you let the room unfurnished (but you may qualify for the property letting exemption of £1,000 instead). You cannot benefit from this allowance and also rent-a-room at the same time.

Nature of the scheme

If you let out a furnished room, or furnished rooms, in your own home, you can earn rental income of up to £7,500 tax-free each tax year. If two or more people share the rental income, each has a tax-free limit of £3,750. The limit remains at £3,750 each even if three or more people share the income and the total tax-free amount exceeds £7,500.

If you earn less than the threshold, the exemption is automatic. You do not need to tell HMRC, or report it on your tax return.

Rental receipts exceed the threshold

If your rental receipts exceed the tax-free threshold (£7,500 for one person; £3,750 for two or more people), you can still benefit from the scheme.

Instead of working out your taxable profits by reference to your rental income less your expenses, you are taxed on the extent to which your rental income exceeds the rent-a-room threshold. This is beneficial if the threshold is more than your actual expenses, as claiming rent-a-room relief will reduce the taxable profit and hence the tax payable.

However, where the rental income exceeds the threshold, you will need to complete a tax return. To claim rent-a-room relief, you can opt into the scheme when completing your tax return.

Partner note: ITTOIA 2005, Pt. 7, Ch. 1.

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