If you’re a home owner or a tenant with a spare room, you’ll be eligible for the Rent a Room Scheme. It means that you can rent a room in your home out to a lodger and earn up to £7,500 a year tax free, or £3,750 for a joint letting.
Before you take in a lodger check with your landlord if you rent a property, or with your mortgage company if own your home. Sometimes mortgage conditions state that you can’t sub-let a home but taking in a lodger isn’t a sub-let.
You should also let your home insurance provider know because it could change the terms of your policy.
Take into consideration too that if you are living alone and you decide to rent a room you will lose the 25% discount on your council tax. Income support, pension credit and other benefits could also be affected. It’s important therefore to work out whether you would be better off using the scheme.
Anyone earning up to the tax threshold will have an automatic tax exemption. But, if you earn more than the threshold you will pay tax on the extra income. When you fill in your tax form you can opt-in or opt-out of the scheme.
If you opt-in state this on your tax return so that you can claim your tax-free allowance. If you opt-out, you fill in the form showing your income and any expenses on the property pages.
If you have high expenses it may well be worth you opting out of the scheme. Your income will be treated as normal rental income with no tax allowance, but you will be allowed to claim expenses. If your expenses are low, then opting-in may be the better choice.
For example; Judith rents out a room in her home for £175 a week. Over the course of the year she makes £9,100. She opts in to the scheme, so she has £7,500 deducted from the £9,100 which leaves the sum of £1,600. She pays basic rate tax at 20%, so her tax bill is 20% of £1,600 which means she pays £320 in tax.
If she had opted out and claimed £3,000 in expenses this would have left her with a sum of £6,100. Her tax bill at 20% would have been £1,220, a considerable difference. If her expenses had been higher she would of course have paid less tax.