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Rent a Room Scheme 2023: All You Need to Know

Updated: Oct 18, 2023

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What is the Rent a Room Scheme?

The Rent a Room scheme is a government incentive that allows landlords and live-in landlords to earn £7,500 of tax-free income every year, by letting out a spare room in their property. The threshold for the scheme was increased back in 2016.


How Does the Rent a Room Scheme work?

  • You let out a room or part of your main property (it can be a whole floor but not a self-contained flat)

  • It must be furnished – unfurnished rooms don't qualify

  • You don't have to be a homeowner – if you have your landlord's consent you can use the Rent a Room scheme as a tenant

  • If you don't normally fill out a tax return and the income is below £7,500 (around £625 a month), the exemption will be automatic – so don't worry about doing anything. If the amount you earn is above the threshold, let the tax office know


How much can I earn by taking in a lodger?

You can earn up to £7,500 rental income tax free by renting a room to a lodger. If you share the property with someone else, like your partner or spouse, you can claim £3,750 each. You can’t both claim the full £7,500

This amount includes everything you charge your lodger for. If your rent includes bills, that all counts towards the £7,500. If you decide to provide additional services like meals or laundry to your lodger (and charge for them), the extra amount must be included in your total income for tax purposes.

If your total income from rent (plus meals etc) in the tax year (April 6th till April 5th the following year) comes to over £7,500 you’ll have to pay some tax.


How to claim Rent a Room tax relief

As long as you don’t earn over £7,500 you’ll be automatically exempt from paying tax on it. If you want to opt out of the scheme and pay tax on the income, see ‘Opting out of the Rent a Room Scheme’ below. You should always keep a record of the income, whichever you’re doing.


Opting out of the Rent a Room Scheme

You can choose to opt out of rent a room relief and declare the income instead. If you choose to go down that route you’ll be taxed on your income under the usual rules for a rental business. i.e. You can deduct allowable expenses and capital allowances from your income and pay tax on the difference.

If you’re choosing to opt out, you’ll need to tell HMRC by January 31st after the end of the tax year in question.


What to do if you earn over £7,500

If you earn over £7,500 by renting out your room you’ll need to fill out a tax return and declare the income.

You’ll need to fill out the property section of your tax return. There are a couple of ways you can choose to be taxed:

  • Pay tax on your profit - i.e. declare the income and any expenses, then pay tax on the difference (HMRC will automatically use this route unless you tell them otherwise)

  • Take the first £7,500 tax free and simply pay income tax on the amount over £7,500. If you’re claiming as part of a couple you can claim £3,750 each. You cannot deduct expenses if you go this route


Rent a room scheme vs paying tax on rental profits

The rule of thumb is that if your allowable expenses and capital allowances as a "rental business" exceed the rent a room scheme allowance (£7500) then opting out of the scheme will be beneficial.

Also, if expenses exceed your rental income - even if your income is less than the rent a room allowance - it may be beneficial to opt out of the scheme as losses can be carried forward and used against future profits


How does the Rent a Room Scheme affect benefits?

The income from renting out your room might affect any benefits you receive, so it’s worth checking in advance.

Council Tax

If you live on your own and get the 25% single person’s Council Tax reduction, you’ll lose this by taking in a lodger.

Universal Credit

If you’re on Universal Credit, whatever you earn from your lodger won’t be counted as income, up to the tax free £7,500 allowance. That makes it a great option for earning some extra cash.

Housing Benefit

The rules around housing benefit for social housing tenants taking in lodgers are slightly more complicated. Essentially it depends on how your lodger is classed.

Boarders

If you also provide meals to your lodger, then they’re classed as a boarder. In this instance, the first £20 per week of rental income a week is exempt, along with half of the remaining rent. For example, if the rent is £100 a week, £20 is exempt automatically, as well as £40 of the remaining £80. The remaining amount (£40 in this instance) is classed as income and could affect your housing benefit.


Sub-tenants

If it’s only the room you’re providing, the lodger is classified as a sub-tenant. The first £20 is still exempt, but the remaining amount all counts as income. For example, if the rent is £100 a week, £20 is exempt, but the other £80 is classed as income, so could affect your housing benefit.


If you have any questions please contact me on 07307 887918 / contact@movingrooms.co.uk


All the best,


Alexandra


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