Blogs
Tax-Free Letting: The Rent-a-Room Scheme
If you've been thinking about letting a room to a lodger in your accommodation, the rent-a-room scheme may be the answer for you. This scheme allows you to rent your room tax-free, but there are a few things you should know before partaking in it!
- Your lodger pays up to £7,500 a year, and this income includes everything you charge tenants as part of the rental service eg cleaning, meals, laundry etc;
- The space you’re letting is fully furnished and not used for business purposes eg an office space;
- You have permission from your landlord or mortgage provider to sublet the space if you rent or own your accommodation, respectively;
- You have permission from your home insurance provider, regardless of if you rent or own your home; and
- You keep a record of the income your lodger pays you.
- A - paying tax on your rental profits: you can opt out of the rent-a-room scheme and pay taxes on your profit aka the amount left after deducting the expenses (losses made while letting the room) from the income your lodger pays you - this is normal rental income tax; or
- B - claiming rent a room relief: you can choose to take £7,500 (or £3,750 if you share your property with another person) tax-free, and then only pay tax on the excess rent amount.
Opting Out of the Rent-a-Room Scheme
If your lodger pays more than £7,500 a year on rent, it may be more cost-effective for you to opt out of the rent-a-room scheme. Whether or not it is most effective depends on if your expenses are more or less than £7,500.
If you choose to opt-out of the rent-a-room scheme, regardless of whether or not your lodger pays more or less than £7,500 a year, you need to inform HMRC by the 31st of January after the end of the tax year. You can inform them by writing to them or stating that you would like to opt out in the property section of the tax return.
It is essential to inform HMRC if your lodger pays more than £7,500 a year on rent and you would like to opt-out of the rent-a-room scheme because they will assume that you choose A and pay rental income tax. Opting for B will mean you cannot claim expenses, but will have an allowance of £7,500 tax-free, It is therefore advisable to opt for A if your expenses are higher than £7,500, and opting for B if your costs are lower than £7,500, as you will ultimately pay less tax in both of these cases.
The Rent-a-Room Scheme can be a great way to earn some extra money if you have room to spare in your accommodation. If you do decide to take part in the scheme, make sure you're fully aware of how taxing works, so you can financially get the most out of it.
If you have any queries or would like to discuss anything mentioned in this blog, feel free to contact us!
We offer a free 30-minute phone consultation - call us on 07762657277.
