Room Rental Tax Benefits
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Renting out a furnished room in your home is a great way to earn extra money. As with any income, you will be taxed.
The government has a rent-a-room scheme to help you save on tax; however, you must meet some conditions.
What is Rent-a-Room?
The rent-a-room scheme allows those eligible to receive £7,500 annually tax-free from renting a room in their home. This amount is reduced to £3,750 if another person rents the same property, such as a joint owner.
How does the scheme work?
If your rental income is less than £7,500 per year, you are exempt from tax. However, if you earn more than £7,500 in taxable income in a tax year, you must file a tax return.
Do I qualify for rent-a-room?
You can opt into the scheme at any time if;
You are a resident landlord, whether or not you own your home.
 |  |
|---|---|
| A furnished room is rented. | Your renting is a trade (e.g., a guest house) |
| Your renting is a trade (e.g., a guest house) | The room is detached |
| You rent a UK room while you’re abroad | |
| This room is for office or business use | |
| The scheme can be used if the lodger conducts evening or weekend business / offers study facilities |
You have 2 options available when choosing how to be taxed on income generated from renting a room in your house.
Option 1: Opt-out
opt-out: Pay tax on profits ( after the deduction of expenses).
Samantha rents a room
She charges her lodger £750 a month (£9000 annually)
Samantha can deduct expenses; profit will be taxed
Her annual expenses were £3000 for repairs and maintenance
Rental Income
| Calculation | Amount |
|---|---|
| Rental Income | £9,000 |
| Deductible Expenses | £-3,000 |
| Profit | £6,000 |
| Tax Payable= £6,000 x 20% | £1,200 |
Option 2: opt-in
opt-in: £7,500 tax-free (£3,750 if shared); tax on excess.
Samantha rents a room
She charges her lodger £750 a month (£9000 annually) – above £7500 rent-a-room allowance.)
£7500 of Samantha’s £9000 will be tax-free
Rental A Room
| Calculation | Amount |
|---|---|
| Rental Income | £9,000 |
| Rent-A-Room Allowance | £-7,500 |
| Taxable Income | £1,500 |
| Tax Payable= £1,500 x 20% | £300 |
Samantha saves £900 by opting for rent-a-room.
Checklist for renting a room
Three things to do before making a final decision:
- If you have a mortgage, ensure room rental doesn’t violate the terms.
- Make sure you can rent under your insurance company’s terms.
- If renting, check if the lease allows lodgers.
Also Read: Tax Return Appeals Guide
Renting your room on Airbnb?
As a short-term rental, Airbnb qualifies for the rent-a-room scheme.
Airbnb owners can benefit from a £1,000 tax-free property allowance or the rent-a-room scheme. Unfortunately, You can’t use both rent-a-room and property allowance at once; you can read more on this here.
Conclusion
It’s essential to pay taxes when earning money. Using schemes and allowances can cut your tax bill.
Our team understands how important and complicated tax can be. We specialise in taxation and are happy to answer your questions and help you choose the right option based on your circumstances to ensure a feasible outcome while remaining tax compliant.
At Fusion Accountants, we are an expert team of professional accountants delivering specialist tax advice and support. We can help you declare rental income to HMRC and report it on your annual self-assessment.
Also Read: Five reasons why your small business has stopped growing
