A relatively simple way of boosting your income in retirement is to rent out a room in your home, if you have the space. The Rent a Room scheme lets you earn £7,500 a year tax-free for doing so, and you don’t need to own your home to use the scheme.
The key rules of the scheme
As long as you meet the conditions listed in the next section, your earnings from renting out a room or rooms in your home are tax-free up to an annual figure of £7,500.
This allowance applies to the whole household.
This means that if you jointly own your home with another person, each person can only claim £3,750 in tax relief.
The scheme is designed to be as simple as possible.
If you don’t already need to complete an annual tax return, then using the Rent a Room scheme involves no paperwork for you as long as your income from the scheme stays beneath the £7,500 threshold.
If you already have to complete an annual tax return, then you must declare your full rental income – even if it is less than the £7,500 limit – and claim your Rent a Room tax relief.
If your income from the scheme is more than £7,500, you can pay tax in two ways:
Option A: you pay tax on your rental income minus £7,500 (with no deduction for expenses or capital allowances)
Option B: you pay tax on your actual profit (rental income minus expenses and capital allowances)
Choosing how to pay tax: an example
You may have seen that it was announced in March 2016 that the first £1,000 earned by individuals renting out their property online, through websites such as Airbnb, would be tax free. If this, or a similar measure is implemented in the future, we will update the site. Until then, tax continues to be payable on this sort of income.
Let’s say that Mary rents out a room for £9,250 a year. Her expenses are £2,000 a year and she pays Income Tax at the basic rate of 20%.
Option A: Mary would pay Income Tax on any rent she receives above the £7,500 limit, which is £1,750. So her tax bill would be £350 (20% of £1,750).
Option B: Mary could claim tax relief for all her expenses, but she’d lose the scheme’s £7,500 tax-free element. This would mean paying Income Tax on £7,250 (the rent of £9,250 minus the expenses of £2,000), which comes to a much higher total of £1,450.
The scheme’s effect on means-tested benefits
Be wary of taking in a lodger if you are claiming means-tested benefits, such as:
- Pension Credit
- Income Support
- Income-based Jobseeker’s Allowance
- Income-based Employment and Support Allowance
- Housing Benefit, (or Universal Credit when it is introduced)
The rent from your lodger will usually cause your benefits to be reduced.
The conditions of the scheme
To use the Rent a Room scheme you must comply with the following four conditions.
- You must let a furnished room or rooms
- The room must be in your family home; where you live most of the time
- The scheme doesn’t apply if you’re renting out a self-contained flat
- The scheme doesn’t apply to letting out space as an office
The following are points you should comply with, but they don’t affect the tax treatment of your income under the scheme.
- If you are getting means-tested benefits, contact Jobcentre Plus or, in Northern Ireland, Jobs and Benefits Office to let them know about your changed income.
If you have a mortgage, check that your lender is happy for you to have a lodger.
- If you are a tenant in your home, check that your lease permits you to take in a lodger.
- Let your contents insurer know that you have a lodger as it might affect your cover and premium.
- If you have been getting a single-adult council tax exemption, you must let your council know that you are no longer living alone. Unless your lodger is a student, you will normally lose the discount, so you should either require your lodger to pay their share or charge enough rent to cover the increase.
- You’ll need an annual gas safety check. Furniture and furnishings must meet safety standards. It’s also a good idea (but not essential) to get electrical equipment PAT-tested.
Be aware that if you have more than two lodgers, your home will count as a House with Multiple Occupation (HMO) and you’ll to comply with a range of extra health and safety requirements.
HM Revenue & Customs might also treat you as running a guest house business, which would affect your tax treatment.
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