Rent a Room Scheme explained: the £7,500 allowance and examples
If you let furnished rooms in your own home, you can receive up to £7,500 a year tax-free under the Rent a Room Scheme. That limit covers everything you receive, for all the rooms together, and it's halved if someone else, such as a joint owner, also receives income from letting in the same home.
The scheme is one of the simplest tax reliefs there is. Under the limit, it's automatic. Over it, you have a choice to make. Here's how it works, with real numbers. The examples use the current limit of £7,500, and the tax year runs from 6 April to 5 April.
Who can use it
You can use it if you let furnished accommodation in your only or main home, to a lodger for example. It doesn't apply to a room that isn't furnished, a home you don't live in, or space used as an office or for a business (HMRC, HS223).
What counts towards the £7,500
It's everything you receive before costs: the rent, plus anything your lodger pays you for meals, cleaning or laundry. If the rent includes bills, the whole amount counts. And it's one limit for your home, not one per room.
Example 1: under the limit
Your lodger pays £600 a month, bills included. Over the tax year that's £7,200. It's under £7,500, so there's no tax to pay and nothing to do. The relief is automatic.
Example 2: over the limit
Your lodger pays £700 a month, plus £50 a month for a weekly clean, so you receive £9,000. You now choose one of two methods:
- Pay tax on everything over £7,500. That's £1,500 taxable. You can't claim any expenses with this method.
- Pay tax on your real profit. That's what you received minus your actual costs. With £2,000 of costs, you'd be taxed on £7,000.
In this example the first method wins, because your costs are well under £7,500. As a rough guide, the allowance is the better choice unless your real costs are higher than £7,500. HMRC uses the profit method unless you tell it you want the allowance, so you'll need a Self Assessment return either way.
Example 3: two lodgers
You let two rooms at £500 a month each, so you receive £12,000 in total. The limit is still £7,500 for the whole home, not per room, so £4,500 is over the limit.
Example 4: sharing the income
You and your partner own the home together and share the rent from one lodger paying £650 a month, which is £7,800 in total, or £3,900 each. When someone else also receives letting income from the same home, each of you gets a £3,750 limit. So you're each £150 over.
Telling HMRC
Under the limit, you don't need to do anything. Over it, you need to fill in a Self Assessment tax return. If you want to change method, or opt out of the scheme in a year when you're under the limit (to claim a loss, say), you must tell HMRC within a year of 31 January after the end of that tax year (HS223).
Under £7,500, the scheme takes care of itself. Over it, a few minutes with the numbers tells you which method costs you less. Our guide to the paperwork for taking in a lodger covers the rest of the list. ✦
General information, not tax advice. Check your own situation, or ask an accountant.