What is the Rent a Room scheme?
If you have a spare room in your house, you could be sitting on a tax-free nest egg. Many more people each year are making a Lodger Agreement and taking in a lodger. And they can earn up to £4,250 a year tax-free income (or £2,125 if you're letting jointly). This is known as the Rent a Room scheme. Find out more about the Rent a Room scheme...
The Rent a Room scheme is a tax-break. A tax-break for renting a room. It means that you don't have to pay tax on any income that you get from renting a room in your house. It's referred to, officially, as an 'optional exemption scheme for income from renting furnished accommodation in your only (or main) home. To you and I it's an easy way to earn some extra cash by taking in a lodger.
You can benefit from the Rent a Room scheme if you let furnished accommodation in your only or family home to a lodger.
If you are both renting furnished accommodation in your joint home, you will each be entitled to receive half of the allowance (i.e. up to £2,125 for the 20011-12 tax year) without paying tax.
If you charge for additional services, you will need to add the payments you receive to the rent, to work out the total receipts. These are calculated as income that counts toward your £4,250 tax-free limit. If you get more than £4,250 a year in total, you will have to pay tax by completing a Self-Assessment Tax Return, even if the rent is less than that.
If you run a B&B or a guest house, or if you provide meals or cleaning services as part of your rentals, you can still join the Rent a Room scheme. You simply need to complete the relevant parts of the self-employment pages of your Self Assessment tax return.
You can benefit from the Rent a Room scheme whether you are a home owner or you are renting your home. However, if you are renting, you will need to check that your lease allows you to take in a lodger.
You should always check with your current mortgage provider and insurance provider before you rent a room and start making that Lodger Agreement. Make sure that your current arrangements are OK, and remember that they are not set in stone. You can change them (or your provider) if you want to!
On the face of it, everyone wants tax-free income. So who wouldn't opt in to the scheme? But, as with all tax-breaks, there are pros and cons. And there are some simple sums you can do now to find out what is right for you.
If you are in the Rent a Room scheme, you can't claim any expenses relating to your lodger letting. These may be things like repairs to the property, wear and tear, insurance, heating and lighting, etc.
To work out whether you will be better off joining the Rent a Room scheme or declaring all of your rental income and claiming expenses on your tax return, you need to compare:
By not joining the scheme, you will be paying income tax on 1. If you join the scheme, you will pay tax on 2. The figures will either add up or not!
If you don't normally receive a tax return and your receipts are below the tax-free thresholds for the scheme, the tax exemption is automatic so you don't need to do anything. There is no need to tell anyone unless you go over the magic £4,250 figure (or £2,125 if you're letting jointly).
But if you wish to join the scheme and your receipts are above the tax-free threshold, you must tell HMRC - you can do this by filling in Self-Assessment tax return and claiming the allowance.
Published on: April 4, 2012