The Rent a Room Scheme allows landlords to let a room in their home, tax-free. Here is everything you need to know.
Between 2021 to 2024, SpareRoom says the rise of homeowners taking lodgers rose by 89% within the UK. Whether this is due to the cost of living crisis, or the rise in mortgage costs, more people are looking at ways to earn extra income through their spare rooms.
With the Government’s Rent a Room Scheme, residential landlords can earn up to £7,500 a year tax-free, just by renting out a room in their home.
Landlords and homeowners can take advantage of this scheme and use any spare rooms in their homes to make some extra tax-free income. There is no limit to how many rooms landlords can rent in their home and still claim Rent a Room relief.
But what is the Rent a Room Scheme? Read on to find out more.
- What is the Rent a Room scheme?
- When can you use the Rent a Room Scheme?
- How to claim for Rent a Room relief
- What if landlords have made a loss in the Rent a Room scheme?
- What if landlords make more than the Rent a Room limit?
- What do landlords need to tell HMRC for the Rent a Room Scheme?
- Does a lodger pay council tax for the Rent a Room scheme?
- Can landlords use the Rent a Room scheme for their short-term lets?
What is the Rent a Room Scheme?
Originally introduced in 1992, the Rent a Room scheme allows landlords to let out a furnished room in their own home. The scheme applies to all residential accommodation within the UK.
The purpose of the scheme was originally to increase low-cost rented accommodation, give more choice to tenants, make it easier for them to move around the country for work, and encourage those with spare rooms to bring in a lodger in their home.
A lodger is someone who lives in the same household as their landlord and shares common rooms with them, such as a kitchen, bathroom or living room. They can either have a fixed-term tenancy agreement with their landlord or a rolling agreement. Lodgers will need to pay a deposit before moving in, which is “usually 5 weeks worth of rent” according to Citizens Advice.
You don’t need to be a homeowner to take advantage of this scheme. If you are a leaseholder, you will need your landlord's permission before you agree to sublet the room.
If a tenant wishes to sublet their room, they will receive this additional tax-free income if they receive under £7,500 a year. This will be reduced to £3,750 if the residential landlord receives income from letting accommodation in the same property, such as a joint owner.
The limit is the same even if you let accommodation for less than 12 months.
Homeowners who have a mortgage can also apply to the Rent a Room scheme. However, you will need to check with your mortgage provider if they will allow you to bring someone into your home.
You should also let your home insurance provider know that you will be taking a lodger into your home, as it may affect your current policy to take into account any extra risk.
Download your tenant's guide to rights and responsibilities in a house share
When can you use the Rent a Room Scheme?
There are no limits on how many rooms you can rent in your home. However, there are requirements that landlords need to fulfil to be a part of this scheme.
You can use this scheme if:
- You let a furnished room to a lodger
- Your letting activity equals a trade (for example, if you run a guest house, or provide services such as meals and cleaning services)
You can’t use this scheme if the accommodation is any part of the following:
- Not a part of your main home when you let it (for example, an annexe that has a separate kitchen and bathroom)
- Not furnished
- Used as an office or for any business
- Is your UK home while you live abroad
How to claim for Rent a Room relief
Landlords can only claim Rent a Room relief if the amount you have made over a year amounts to less than £7,500.
The Government website says “If your gross receipts are less than £7,500 (or £3,750), you’re automatically exempt from tax on that income”. You can count the gross amount during the tax year.
Your gross receipts must include the following:
- Rental income (before expenses)
- Any amount you receive for meals, goods and services
- Any ‘balancing charges’
What if landlords have made a loss in the Rent a Room scheme?
If a residential landlord has decided to rent their room in their home, but over the course of a year has made a loss, the Government states it may be better to pay tax the normal way.
Whether your expenses cost more than the rent you took in, or the rise of electricity and gas has caused a loss, it might be better for a landlord to pay the taxes “on your receipts less expenses”.
What if landlords take more than the Rent a Room limit?
If you choose to be a part of the Rent a Room scheme, but you take more than £7,500 (or £3,750), you will need to work on your taxes.
Landlords can either pay tax on their actual profit, which will be the total of all receipts minus any expenses and capital allowances, or pay tax on their gross receipts once it's over the Rent a Room limit.
The Government has presented an example of what each option would look like.
If a residential landlord rents out a room in his home for £200 per week plus added extras such as electricity and gas, the gross amount at the end of the year is £10,600 with expenses of £9,000.
- If they use their actual profit, they will have to pay tax on £1,600 (£10,600 minus £9,000).
- Or they could use the gross receipts over the Rent a Room limit, they will need to pay tax on £3,100 (£10,600 minus £7,500).
Landlords can decide how they pay the extra tax every year, depending on which is best for them. They will need to tell HMRC within a time limit if the landlords want to change.
However, if a residential landlord no longer wants to be a part they will need to opt out of the scheme.
What do landlords need to tell HMRC for the Rent a Room Scheme?
When completing their tax return at the end of the year, landlords must tell HMRC if they want to be a part of the Rent a Room scheme. They can do this either by completing the option on their tax return to claim the allowance or by declaring their rental income on the property pages of their return just like a landlord would do with any other rental income.
If the landlord no longer wants to use the Rent a Room scheme when your receipts are below £7,500 (or £3,750), they must tell HMRC within one year of 31 January following the end of the tax year.
Does a lodger pay council tax for the Rent a Room scheme?
No, the landlord/homeowner is responsible for council tax. However, they can include the cost of the council tax as part of their rent.
The landlord must also tell their local council if they no longer live alone, or if their local authority has certain property licensing requirements.
Can landlords use the Rent a Room scheme for their short-term lets?
Currently, residential landlords can use the Rent a Room scheme for their short-term lets. As long as the rent taken over the space of the year amounts to less than £7,500 (or £3,750) a year, they can claim the Rent a Room scheme.
For landlords in London, the Rent a Room scheme can be useful to short-term landlords as they can only rent a room up to 90 days a year.
However, there are other benefits, such as a tax-free property allowance of up to £1,000 (before expenses) each financial year. So the Rent a Room scheme may not be the best option for residential landlords, and they should look into other options to see what’s best for them.
This article is intended as a guide only and does not constitute legal advice. For more information, visit gov.uk.
