Your guide to the rent-a-room scheme

Did you know that you can receive up to £4,250 per annum in tax-free income by renting out a furnished room in your home?

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The government’s rent-a-room scheme is designed to encourage people with spare rooms to take in lodgers. Here’s everything you need to know about how it works.

Who qualifies?

If you have a furnished spare room that you can rent out in your main or only home, you could qualify for the scheme. You don’t even have to be the owner of the home, as a tenant you can just as easily qualify by renting out a spare room. Just don’t forget to get the owner’s permission to do so.

What is the income tax relief threshold?

If the gross income on your rental – including money received for meals, drinks or laundry – adds up to less than £4,250, you won’t need to pay tax on any profits made. The relief applies to a tax year (for example 6 April 2014 to 5 April 2015) and the £4,250 threshold is reduced to £2,125 if anyone else receives income from letting accommodation in the same home, during the same tax year.

Opting into the scheme

If you earn less than £4,250 on your property, you don’t need to do anything because the exemption is automatic, but if you earn more than the threshold you will need to complete a tax return.  There you can either choose to opt into the scheme and claim your tax-free allowance, or not opt in and rather just record your income and expenses under “property”. Either way is perfectly acceptable.

Opting out of the scheme

Once you have opted into the rent-a-room scheme, you can easily opt out. To do so, you must tell HMRC by 31 January of the same tax year, either in writing or via your tax return.

What if you earn more than £4,250 from your rental?

If your rent-a-room earnings exceed the limit, you have a choice of:

  • Paying tax on the actual profit from the property (calculated as income received, minus allowable expenses)
  • Paying tax on the gross income, less the tax-free threshold of £4,250

Are there exceptions?

You may not participate in the rent-a-room scheme if you are renting an unfurnished room, or by renting out a room to be used as an office or business space. The scheme also doesn’t apply if your home has been converted into two or more separate flats that you rent out.

If you are thinking about renting out a room in your home and opting into the scheme, you can find out more on this HMRC helpsheet. Remember, it’s up to you to make sure you aren’t breaching the terms of your mortgage, lease or insurance contract. If you need advice or information, or for assistance with your tax return, visit www.1stcontact-accounting.com. 

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