If you’ve got a spare bedroom in your house and are in need of additional income, letting the room out to a lodger could be a tax-efficient way to bring in a little extra money. With the UK government’s Rent a Room tax relief scheme, both landlords and tenants can benefit from tax relief for renting a room in their home.
In this guide to rental income tax relief from the expert tax advisors at UWM Accountants, you’ll learn all you need to know about the UK’s rent room relief scheme, including whether it’s right for you, how to opt into it, and how to pay any tax on rental income you’re due.
What is the Rent a Room tax relief scheme?
The Rent a Room scheme was introduced in 1992 by the government as a means of encouraging UK homeowners and private landlords to let out their spare rooms—in an attempt to stimulate the economy and relieve pressure on the housing market.
The scheme provides tax relief to those who let out a room in their own private residence to lodgers (provided they also live at the same address—which we call being a ‘live-in landlord’ or ‘resident landlord’).
Individuals who opt into the scheme receive a £7,500 annual tax-free allowance on the income they receive from renting out the room. If rental income is split—i.e., between a married couple who jointly own their home—then the rent room relief is also split, both parties receiving £3,750 of tax free allowance on rental income instead.
Who is eligible for rent room relief?
In the UK, anyone who owns their own home and rents out a portion of the property to other lodgers can opt into the Rent a Room tax relief scheme. Some tenants (people who rent, rather than own their home) may also be eligible for tax relief provided their lease allows them to sub-let their spare rooms. Regardless of whether you rent out a single room or the majority of your home, tax relief is capped at £7,500 per year.
Resident landlord perks and obligations
It’s worth taking a moment to acknowledge both the advantages and obligations which come with being a live-in landlord. If you choose to rent out a room in your own home to lodgers, it is your responsibility to:
- Keep your property safe and in good repair
- Draft a rental contract (a lease) for your tenant
As a resident landlord living in the same property you’re letting out, you also have more leeway when it comes to things like setting prices and giving notice.
- Tenants and lodgers cannot legally challenge the rental price once it is agreed to
- Resident landlords can give less notice to lodgers or tenants to end the letting, compared to the notice required when letting out a separate property as a whole
What about renting out my home on Airbnb?
When the popular homestay app Airbnb first started up, most hosts rented out a room or two in their own home, thus qualifying as resident landlords who could opt into HMRC’s Rent a Room scheme.
Today, however, it is more common for Airbnb hosts to rent out a property in its entirety, without also staying onsite. Depending on the nature of your Airbnb listing, you may or may not qualify for the rent room relief.
You can check your rental tax status via HMRC’s website.
What if you run a traditional B&B or guesthouse?
Traditional bed and breakfasts (B&Bs) and guesthouses, in which the owner of the property lives onsite, should automatically qualify for tax relief from HMRC.
Tax relief for letting a room: How to calculate and pay tax on rental income
Tax relief for renting a room is capped on the Rent a Room scheme at £7,500 per year.
If you earn less than £7,500 a year from your tenant or lodger, you don’t need to calculate or do anything more. Your earnings are automatically tax-free, and so can be enjoyed without having to tell the taxman or file a self-assessment tax return.
However, if your income from renting out a room in your home exceeds £7,500 a year, you will be taxed on the excess amount at your highest tax band rate.
For example, if you make £10,000 a year from rent, you’d be taxed on the £2,500 above the Rent a Room tax relief threshold. If you’re a basic rate taxpayer, you’d be charged a 20% tax on this, resulting in a £500 tax bill. Or if you paid tax as a higher rate taxpayer, you’d be charged 40% of the £2,500, resulting in a £1,000 bill.
It is generally up to you, the landlord, to calculate the rental income tax you owe, report and pay it to HMRC in an annual tax return. Which is why outsourcing that work to a personal accountant may be a wise move.
Considering capital gains tax on the sale of your home
If you plan to sell a second home which you’ve rented out, you will be charged capital gains tax (CGT) on any profit made from the sale. On the other hand, if you plan to sell the home you live in (or have lived in previously) while renting a portion of it to tenants, you should be eligible for some form of capital gains tax relief.
Is the Rent a Room tax relief scheme right for you?
Tax relief for renting a room sounds like a no-brainer; an easy win. However, depending on your earnings and expenses, you may not always benefit from opting into the Rent a Room tax relief scheme.
If you choose to opt in, you get £7,500 rental income tax-free, but pay income tax on anything earned in excess of this allowance. You cannot deduct expenses from your rental income.
If you choose to opt out of the scheme, you get no tax-free allowance on your rental income, but you can deduct allowable expenses from it before paying tax.
As such, the tax efficiency of the relief scheme depends on your personal incomings and outgoings. As a general rule of thumb, if your allowable expenses exceed the £7,500 tax relief offered by the scheme, you’re better off without it.
Take a look at the examples below for more detail and to get a better idea of how room rent relief might work for you.
Example A
Alice rents out a room in her home for £140 a week. Her annual earnings from the rent are £7,280. Because Alice’s rental income falls below the scheme’s tax-free allowance, she doesn’t need to decide whether or not to opt in; she automatically enjoys her rental income tax free.
Example B
Alice rents out a room in her home for £200 a week. Her annual earnings from the rent are £10,400; she spent £2,000 on property maintenance and other allowable expenses that year. Alice’s rental income exceeds the scheme’s tax-free allowance by £2,900. At her Higher Rate tax band, she would owe £1,160.
In this example, it benefits Alice to opt into the Rent a Room scheme because, if she were to opt out, the Higher Rate tax she’d pay on her rental income, even after deducting her £2,000 maintenance costs, would be £3,360—far more than the tax due withthe scheme.
Example B
Alice rents out a room in her home for £400 a week. Her annual earnings from the rent are £20,800; she spent £9,000 on property maintenance and other allowable expenses that year. Alice’s rental income exceeds the scheme’s tax-free allowance by £13,300. At her Higher Rate tax band, she would owe £5,320 on this excess.
In this example, it benefits Alice to opt out of the Rent a Room tax relief scheme, because by opting out, she is allowed to deduct her £9,000 expenses before applying tax to her rental income. Doing so would leave her with taxable rental income of £11,800 and a corresponding tax bill of £4,720—far less than the tax due with the scheme.
Considering council tax, universal credit and other housing benefits
There are a few other considerations to be aware of when weighing up the pros and cons of the Rent a Room tax relief scheme for your own purposes.
Council tax
If you live alone and enjoy the 25% Single Person’s Council Tax Discount, it’s important to know that taking on a lodger or tenant would lose you this discount.
Universal credit
If you’re on universal credit, taking in a lodger could be a great way to increase your yearly earnings, so long as your income from rent falls within the £7,500 tax-free allowance.
Housing benefits
If you receive housing benefits, the money you make as a live-in landlord could affect your benefits, potentially even causing you to lose them if your rental income is high enough.
Top tip: Providing meals to your lodgers as part of the rental agreement classifies them as ‘boarders’. For every boarder you rent a room to, you are allowed to deduct both the first £20 of their weekly rent and half of the remaining amount tax-free.
VAT
Depending on the income generated by your rental business or side-hustle, you may be liable to collect and pay VAT on rent. Whilst generally rent is VAT exempt, this is not always the case.
Struggling with tax planning? Speak to a local expert
Tax planning is stressful, there’s no two ways about it. Trying to make sense of HMRC’s various rules, regulations and incentive schemes—like the tax relief available for renting out a room of your home—can be exhausting, even with the aid of a guide like ours.
And with all the daily demands of landlord life, there’s always the chance that you’re missing out on opportunities to be saving significant money on your tax bill, too.
If you’d rather cut right to the chase and know for sure that your accounts are as tax efficient as they can possibly be, then take the next step on your resident landlord adventure: talk to a local expert in business and personal tax.
