Boost your income by letting out your spare room
With the cost of living going up, earning some tax-free income sounds pretty awesome, right? If you have a spare room, you can actually do that by renting it out and using the rent-a-room scheme.
What’s Rent-a-Room?
The rent-a-room scheme lets you earn up to £7,500 tax-free each year by renting out one or more rooms in your home. If you're sharing the income with someone else, you each can earn up to £3,750 tax-free per year.
To qualify, the room has to be in your main home and rented out furnished. You can also use this scheme if you run a guest house or a B&B.
How the Exemption Works
If your gross rental receipts (the money you get before expenses) are below the rent-a-room limit (£7,500 or £3,750 depending on if one or more people get the income), you don't need to tell HMRC or pay tax on it.
If your rental receipts are higher than the limit, you can still use the scheme and deduct the rent-a-room limit instead of your actual expenses if that’s better for you. This is useful if your actual expenses are less than the rent-a-room limit.
Example
Kelly rents out two spare rooms in her home for £100 a week each. She makes £5,200 a year from each room, so £10,400 in total. She has £2,000 in expenses for the year.
Since Kelly’s rental income is over the £7,500 limit, her income isn't fully exempt. If she deducts her actual expenses from her gross rental income, her taxable profit is £8,400.
But, if she chooses to deduct the £7,500 rent-a-room limit instead of her expenses, her taxable profit is only £2,900 (£10,400 - £7,500). This option is obviously better for her.
Choosing Your Method
If your rental income is over the limit, you’ll need to do a Self Assessment tax return. HMRC will usually deduct your actual expenses from your rental income (Method A) unless you say otherwise. If you want to use the rent-a-room limit instead (Method B), put it in box 37 of the UK property pages on your Self Assessment form.
You can switch between these methods each year to see what works best for you.
Losses
If you make a loss and your rental income is below the rent-a-room limit, you might want to calculate the loss the usual way instead of using rent-a-room relief. This way, you can set the loss against future profits. In this case, you’ll need to complete a tax return without claiming the rent-a-room relief.