Business Resources

Do I Pay Tax on Renting Out a Room in My Home?

By

Chris Andreou

Do I pay tax on renting out a room in my home?

Do I pay tax on renting out a room in my home?

As rental costs continue to climb across the country, renting a room in your home can be a great way to bring in extra income. But what many renters may need to learn is that they're eligible for tax relief when they rent a room.

Rent-a-room tax relief is a government incentive that can benefit those renting out a room in their home. Knowing how to make the most of this incentive can make a big difference in the amount of money you receive each year in tax relief.

Image Credit: Pavel Danilyuk / Pexels

It's worth noting that while rent-a-room relief can reduce your tax bill, it's also essential to be aware of the associated expenses. Whether you're hosting a one-time guest or renting long-term on Airbnb, it's necessary to understand your rental agreement's tax implications to avoid surprises.

You can make the most of the benefits available by learning the rent-a-room tax relief regulations. So, if you're considering renting a room in your home, it's worth exploring how rent-a-room relief could make a difference to your finances.

What Is the Rent-a-Room Scheme?

The rent-a-room scheme is a straightforward way to earn rental income from rooms in your home. It allows you to rent out furnished accommodation in your primary residence to lodgers in exchange for rent payments. The best part? The income is tax-free up to a specific limit each tax year.

By joining the scheme, you're entitled to a yearly tax-free allowance of up to £7,500 for your rental income each year. Any amount over this limit is taxable, and you must inform HMRC. 

Remember that even if your rental income is within the tax-free limit, you are required to report it to HMRC. Additionally, keeping records and receipts of the income and expenses related to the rental place is necessary. 

With this rent-a-room scheme allowance, you can keep more of the rental profits. The rules around reporting rental income, deductions and claiming "rent-a-room exemption" aren't too tricky. As long as you keep good records, you'll sail through them.

How Does the Rent-a-Room Scheme Work?

If you're considering participating in the rent-a-room scheme, you must understand how it works. The rental room must be furnished, and the length of the tenancy can be whatever you decide, regardless of the rent you set.

As with any income you earn, you must declare any rent-a-room income on your self-assessment tax return. The scheme operates in the same way that you would report any other income. The tax return will indicate how much you can claim as expenses from your rent-a-room scheme.

Under this scheme, you're entitled to an allowance of up to £7,500 per tax year for renting a room in your home to one individual. However, if you earn more than £7,500 in any tax year, the amount over the allowance is subject to a 20% tax rate.

If your total income falls between £31,786 and £150,000, you'll pay tax at a rate of 40%. For those earning over £150,000, the tax rate increases to 45%.

Image Credit: Karolina Grabowska / Pexels

The Conditions for the Rent-a-Room Scheme Eligibility

The scheme applies to anyone renting a furnished room in their primary residence. This can include a guest house or a rented room, but it's crucial to meet the requirements for eligibility.

You can opt-in any time considering:

  • You are the resident landlord of the house. When you are not the owner, you can still sub-let the place upon the homeowner's permission. 
  • You operate the place as a guest house or a bead-and-breakfast. 

When you're a homeowner, you must contact your mortgage provider before renting a room. Depending on their policies, they might allow you to lease your home under your current rate and terms. You may have to pay a fee and wait a certain period for permission. In some cases, the provider may demand a refinancing process.

Whether you're a homeowner or not, you must take permission from your mortgage provider.

When Is the Rent-a-Room Scheme Not Applicable?

Unfortunately, not everyone qualifies for the scheme, and you should understand the situations in which it's not applicable.

Suppose the accommodation is used for business purposes or as an office. In that case, the scheme can't be used, except in cases where the lodger is a student provided with study facilities or works in your home during weekends or evenings.

The rent-a-room scheme won't be applicable when:

  • It's an unfurnished room. 
  • The room is separate from your primary home.
  • The landlord does not reside in the UK. 

What to Do When You Earn Over £7,500?

The tax-free income limit for the rent-a-room scheme is £7,500 per year. You must file a tax return when you earn more than this limit. There are two options when filling out the tax return form's property section:

Option A: You can pay taxes on your profits in a typical way for a rental business by calculating your actual profit after subtracting expenses.

Option B: You can use the rent-a-room scheme and claim a tax-free allowance of £7,500 (£3,750 for couples) per year. Any rental income exceeding this amount will be subject to income tax.

To opt out of the scheme, you must inform HMRC before 31 January following the end of the relevant tax year. You can do this by sending a written request to HMRC or filling out the property pages on the tax return.

Image Credit: Nataliya Vaitkevich / Pexels

How Does Renting a Room Affect Your Taxes?

When renting space in your home, you should understand its impact on your taxes. Even if you only rent out one room, the same taxation rules apply as if you were renting out the entire house. It means that any rental income you receive must be reported as taxable income on your tax return. However, there are ways to reduce your tax liability.

For instance, you may deduct expenses, such as garbage, laundry services, and water costs, for your tenant. Keep track of all these expenses and report them accurately on your tax return to maximise your tax exemption.

Conclusion

Renting a room in your home is a great way to earn extra income and increase your assets. However, it's essential to consider the tax implications, particularly the rent-a-room tax relief. Figuring out the tax consequences of renting will help you make the most of the tax relief and maximise the financial benefits of this arrangement.

Read more of our free business resource guides

Business accountant available for free consultation

Get a free accounting consultation

We'll walk through everything you need for starting or switching.