Earn Tax-Free Income from Your Spare Room with the Rent-a-Room Scheme

In times when the cost of living is on the rise, generating additional tax-free income can be particularly appealing. If you have a spare room in your home, the Rent-a-Room Scheme presents an excellent opportunity to do just that.

What is the Rent-a-Room Scheme?

This scheme allows homeowners to earn up to £7,500 per tax year, tax-free, by renting out furnished rooms in their primary residence. If the income is divided among multiple people, each can earn up to £3,750 tax-free annually. The scheme is applicable whether you’re renting out a single room or several, and is also available to those operating a guest house or bed and breakfast.

Understanding the Exemption

You won’t need to report your income to HMRC or pay tax on it if your gross rental income—what you earn before any expenses—is at or below the £7,500 threshold (£3,750 for shared income). However, if your rental income exceeds this limit, you can still benefit from the scheme by opting to subtract this threshold from your gross income rather than detailing actual expenses to determine your taxable profit.

Practical Example

Kelly rents out two furnished spare rooms in her home at £100 per week each, totalling £10,400 annually, with £2,000 in expenses. Since her income exceeds the £7,500 threshold, she faces taxation. By utilising the Rent-a-Room Scheme and opting to subtract the £7,500 threshold rather than her actual expenses from her gross income, Kelly reduces her taxable profit to £2,900—a financially smarter choice.

Choosing Your Method

If your rental income surpasses the Rent-a-Room limit, declaring this on a Self Assessment tax return is necessary. HMRC typically calculates profits by subtracting actual expenses from rental income. However, you can opt for the scheme’s deduction method by indicating this on your tax return. Flexibility between calculation methods year by year allows you to optimise your tax position.

Handling Losses

Should you incur a loss with rental income below the scheme’s threshold, you might prefer to calculate this loss traditionally (without invoking the Rent-a-Room relief) to offset against future profits. This requires completing a tax return and forgoing the Rent-a-Room claim for that year.

Conclusion

The Rent-a-Room Scheme is a valuable tool for homeowners looking to leverage unused space in their home for financial gain without incurring additional tax liabilities. By understanding and strategically applying the scheme’s benefits, you can enhance your income in a tax-efficient manner. Whether you’re just making ends meet or saving for the future, the Rent-a-Room Scheme offers a practical solution to boost your finances.

 

 
 
If you found this useful, please share it using the icons at the side of the page, or leave a comment below.

Any questions?

If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant