If you have a spare room in your home (applies to tenants also) and you don’t mind living with someone who is not family (of course, you can vet them first!) then you could be earning up to £7,500 completely tax free.

The government Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.

You can let out a room or an entire floor.

You can opt in to the scheme at any time if:

  • you’re a resident landlord, whether or not you own your home – although if you are a tenant you should check your tenancy agreement first
  • you run a bed and breakfast or a guest house

You can’t use the scheme for homes converted into separate flats.

 

You also need to be aware of the type of tenancy you offer your lodger. One type allows for you terminate their tenancy provided you give them reasonable notice (Excluded occupier); the other type requires that you take them to court to evict them if they refuse to leave. The difference depends on whether they share communal spaces with you and your family.

Rent and what to charge:

You can charge what you want for rent but should agree the amount with your tenant beforehand. You can also ask for a deposit and you can accept Housing Benefit for rent.

You must provide a rent book for tenants who pay weekly. Other things that might impact what you charge include:

  1. Utility costs – You can only charge your lodger the amount you’ve actually paid for gas and electricity plus VAT – it is illegal to make any profit on utility charges
  2. Council Tax – You will be responsible for the Council tax but you can include part of the cost within the rent you charge. You must tell your council if having a tenant means you’re no longer entitled to a single person discount.

 

Tax

If your rental income, after deducting allowable business letting expenses (insurance, maintenance, repairs, utility bills) is less than the £7,500 then you can claim the rent-a-room relief and this amount will then be free from income tax.

You may have to pay Capital Gains Tax when you sell your home if:

  • you let out all or part of it
  • you’ve taken in more than 1 tenant or lodger at a time

However, you may be eligible for Private Residence or Lettings Relief.

Earn £7500 tax free from renting out your spare room in your home