Under the Rules of the Rent a Room Scheme everyone in the UK is entitled to rent out a furnished room in their own home and collect up to £7,500 rent tax-free every tax year.
A tax year runs from 6 April to 5 April.
Here’s an overview of how the Rent a Room Scheme works.
Rent A Room Scheme Tax £7,500 Allowance
Everyone can collect
You do not need to let HMRC know or submit a Self-Assessment Tax Return unless one is needed for another reason.
The allowance is halved if you share your home with someone else or a partner.
Rent A Room Tax Above the £7,500 Allowance
If you collected more than £7,500 in rent then you will need to submit a tax return detailing how much you have made and the tax you need to pay.
There are two methods available to you to work out how much you have earned from renting a room in your house and the tax you need to pay:
METHOD A You can simply declare all the rental income you have received from your lodgers and pay tax on the amounts over and above the £7,500 threshold.
METHOD B You can choose to show how much profit you made renting the room. The profit is the rental income you collect less any expenses you have incurred. Typical expenses can include insurance, repairs, maintenance, a portion of utility bills and accountants fees.
You can choose each year on your tax return which method suits you because you may find it advantageous to switch between the two depending on how much rent you have collected.
If you are new renting out a room and earn less than £7,500 but expect this to increase to above the limit then it could be worthwhile submitting a self-assessment tax return.
You can then record your tax loss in the current year as you can use it against future profits and save tax.
How Much Tax Will You Pay Under the Rent A Room Scheme?
Income tax is calculated at different rates according to how much you earn in total during a tax year.
So to estimate your rent a room tax you need to add up everything you earned such as employment income, pensions, dividends and interest.
For 2019/2020 the income tax rates are:
|Basic rate 20%||£12,501 to £50,000||£11,851 to £46,350|
|Higher rate 40%||£50,001 and £150,000||£46,351 to £150,000|
|Additional rate 45%||over £150,000||over £150,000|
An Example of Working Out Rent a Room Scheme Tax
In the tax year 2018/2019 Sarah earns £45,000 per year in full time employment and collects £10,000 from renting a room in her house and she opts to use method A for calculating her tax.
Her total income for 2018/2019 is £55,000 and it is this figure she needs to use to work out how much tax she owes for the year.
Her tax bill would be £12,730 which is worked out as follows:
£11,850 0% = £0.00
£22,650 20% = £4,530
£20,500 40% = £8,200
Total Tax Due £12,730
Since Sarah was employed she will have paid tax through the payroll system already so will be able to deduct this amount from her total tax due of £12,730 and pay the balance over to HMRC by 31 January 2020.
Sarah will find the total amount of tax she has already paid by looking on her payslips or P60.
Updated 2 April 2019