If you have a lodger already, or you are thinking about letting out a furnished room in your home, you need to know about the government’s Rent a Room scheme. The scheme allows you to earn an income from renting out a room in your home of up to £4,250 a year free of tax. If you are renting out a room jointly with another owner of your home, then you will each be able to earn £2,125 each. The scheme is optional and allows you to earn a tax-free gross income (before expenses are subtracted) from renting out furnished accommodation within your main or only home.
The room you rent out must be within your main or only home, which is the home that you or your family dwell in for most of the time. The person who occupies the rented room is a lodger, they may share living space with you or your family or have meals included as part of your arrangement. A lodger could occupy one room or one whole floor of your home, but if the accommodation is unfurnished or your house has been converted into separate self-contained flats then the scheme will not apply to you. When you rent out separate flats, or the rooms are unfurnished, you will need to declare your income to HM Revenue and Customs in the usual way.
The scheme does not only apply to homeowners and if you rent your home you can still take part in the scheme. Though if you are renting, you need to check whether or not your lease will allow you to take in a lodger. Taking in a lodger when you are not permitted could violate the terms of your tenancy agreement, so it is essential that you know whether or not you are allowed to in advance. When you are a mortgage payer, it is essential that you check to see whether your mortgage agreement allows you to take in a lodger, and you should know that landlords house insurance may also be required.
When you provide meals or laundry (or any other additional services) the payments you receive for them are to be added to your gross rental income. If this adds up to more than the £4,250 limit, then tax will be payable even when your rental income is below the threshold. Under the Rent a Room scheme you will not be able to claim tax relief for any expenses relating the rental arrangement (including wear and tear, landlord insurance, repairs, heating or lighting), so you will need to work out whether the scheme will benefit you before you join it.
You should take into account how much income you have left after deducting expenses, and the amount your receipts total up to. When you opt out of the scheme you will be charged income tax on the income you have remaining after expenses, and when you opt into the scheme you will pay tax on the total of your receipts. It is essential that you have adequate landlord home insurance in place when you share your home with a lodger, but it might be hard to secure the cover you need. With homeprotect you can get landlord contents insurance even when you share your home with people who aren’t in your immediate family.