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Rent a Room Scheme: Using the Tax-Free Allowance + Claiming Tax Relief (2023)

What is the UK Rent a Room Scheme?

The government rent a room scheme let’s UK individuals earn £7,500 tax-free from letting a furnished room to a lodger in their own home.

All UK residents are entitled to claim the allowance every tax year* but the amount is halved to £3,750 if you share your home with your partner.

*the tax year runs from 6 April to 5 April each year

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

DID YOU KNOW

The UK rent-a-room allowance can be used if you run a guest house, bed and breakfast or rent on Airbnb.

How the UK Rent a Room Scheme 2022 Works

You can collect tax-free gross rental income of up to £7,500 every tax year from a lodger in your own home in a furnished room. You get the allowance if you rent your house as well although you’ll need permission from your landlord to take in a lodger.

From April 2019 you are now required to be living in the property for at least part of the time that the room is let out. The allowance is to help individuals earn extra tax-free income and this rule stops the allowance was being exploited by Airbnb owners.

You cannot claim the allowance if you rent a room to a lodger that is:

  • not part of your main home;
  • in your second home
  • unfurnished
  • used as an office or for any business
  • is let while you are living abroad

Gross rental income means all rental income your receive, before expenses you pay like electricity and rates, plus any amounts paid for meals, goods and services such as cleaning or laundry

Do You Declare Rent a Room Income to HMRC?

If your gross rent from your lodger is below the £7,500 limit you don’t need to let HMRC know or submit a tax return to claim it unless you complete a return for another reason.

You are automatically entitled to the allowance so there is no claim to make for it.

Once you go over the £7,500 limit you’ll need to declare your rent from your lodger to HMRC and pay income tax, depending on how much you have earned.

60% tax trap

How Rent a Room Tax Works

Once your lodger income goes over the £7,500 threshold, you’ll need to declare your income to HMRC by registering for self assessment and filling in a tax return.

HMRC will automatically calculate how much tax you need to pay from the information you enter on your tax return. The amount of tax you pay on your rental income will depend on:

  • How much you’ve made
  • Your total earnings for the tax year from all your income streams;
  • Whether you choose Method A or Method B for rent a room tax calculation purposes.

Method A v. Method B for Rent a Room Tax

Method A: pay tax on gross rental income over the rent-a-room allowance of £7,500, but you can’t deduct any expenses

Method B: pay tax on your actual rental profits – the difference between gross rental receipts less any allowable expenses. You cannot create a tax loss.

HMRC automatically assumes that you use Method A.

Here’s an Example:

Karan has a lodger in the 2022 tax year who pays her £10,000 and has £9,000 in expenses in relation to renting the room. She earned £20,000 in her full-time job and paid income tax of £1,486.

Method A

Karan will pay income tax on gross rental income by claiming rent a room tax relief on the first £7,500, without deducting any expenses of £2,500 (£10,000 minus £7,500).

Her total income is £22,500 (£20,000 + £2,500) and she will need to pay income tax of £500 on her lodger income:

  • 0% on the first £12,570 = £0
  • 20% on the remaining £9,930 = £1,986
  • Deduction for tax paid on her payslip = £1,486
  • Income tax to pay £1,986 – £1,486 = £500

Method B

As above but Karan pays income tax on the profit made from her lodger of £1,000 in the 2022 tax year.

Her total income is £21,000 (£20,000 + £1,000) and she will need to pay income tax of £200 on her lodger income:

  • 0% on the first £12,570 = £0
  • 20% on the remaining £8,430 = £1,686
  • Deduction for tax paid on her payslip = £1,486
  • Income tax to pay £1,686 – £1,486 = £200

Karan pays less tax under Method B.

DID YOU KNOW

You can create a tax loss with method A but not with method B.

If you are new to renting out a room and have incurred costs but have gross rental income of less than £7,500 it could be worthwhile completing a tax return using method A.

That way you can then record your loss in the current year as you can use it against future profits to save tax in later years.

How To Claim Rent-a-Room Tax Relief on Your Tax Return

Your gross rental receipts need to be included in the property section of your tax return form. There are three entries that need to be made:

1. Put an ‘X’ in box 4 to indicate to HMRC that you intend to claim for Rent a Room:

2. Enter Income collected from renting out the room.

Rent a Room Scheme Tac Relief
Claiming Rent A Room Tax Relief

3. Enter your claim for Rent a Room Relief in Box 37.  This cancels out the income entry you made and means no tax charge will be made.

What Happens If I Move House During the Tax Year?

If you move house during the year, you’ll need to add up your gross rental receipts and expenses if you’re claiming them.

You are only entitled to the £7,500 allowance once per year, not per house.

Rent a Room and Universal Credit

Taking in a lodger doesn’t count as income for universal credit purposes.

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