Rent a room scheme and tax

Many homeowners rent out one or more rooms in their property as a way of earning extra income. But there are various considerations which must be taken into account, including tax implications.

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What is the 'rent a room' scheme?

The 'Rent a Room' scheme allows homeowners to earn up to £7,500 each year tax free by renting out a room to lodgers. In order to qualify, the room must be in their main home and offered on a fully furnished basis. Certain homeowners will need to obtain permission from their mortgage provider (eg if there is a relevant stipulation in the contract regarding lodgers). People renting a home may be able to sub-let a spare room under the 'Rent a Room' scheme but they will generally need permission from their landlord.

What tax needs to be paid under the scheme?

Individuals do not need to pay tax on the first £7,500 which is earned under the 'Rent a Room' scheme each year (if a couple decides to rent out a room under the scheme they will each have a £3,750 tax free allowance).

The tax free threshold covers all expenses charged to the lodger - so if they are charged separately for cleaning, utility bills or laundry, these fees must also be counted as part of the overall amount.

Tax must be paid on any amount over the tax free threshold in the normal way. However, it should be noted that expenses related to the lodging cannot be offset when taking advantage of the scheme.

How do I claim the tax free allowance?

There is no requirement to opt into the 'Rent a Room' scheme - and consequently no need to claim the tax free allowance formally. Records should be kept but, as long as any income earned falls within the tax free threshold, there is no obligation to report this to HMRC.

Is a tax return required?

People taking advantage of the rent a room scheme who are not eligible for self assessment (ie who are taxed at source by their employer via PAYE and who do not need to fill out a tax return for other reasons) will not need to complete a tax return unless they receive in excess of the tax free threshold. If they receive above the threshold, a tax return will be required.

Do I need to notify HMRC?

There is no need to inform HMRC unless income earned under the rent a room scheme exceeds the threshold. If the income earned does exceed the threshold contact HMRC and ask for a tax return form.

People who do not wish to claim the tax relief will need to pay tax in the normal way on any rent earned from lodgers, and should indicate this in the relevant section of their tax return.

Anyone who decides to opt out of rent a room relief - or switch back - should notify HMRC by filling out the relevant section in their tax return.

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