Do you have a spare room in your home? If so, renting it out can be an easy way for you to reduce your tax bill. In the next part of our series ‘52 Ways to Save Tax’ we look how you can reduce your earnings by taking in a lodger.
Keep reading to find out how using the ‘Rent a Room’ scheme can help you to pay less tax.
52 Ways to Save Tax – Part 9: Rent out your spare room
If you own a rental property then you are generally taxed on the income you receive less any allowable expenses. However, if you let out furnished accommodation in your home then you are entitled to a tax break.
If you rent out a room in your home then you may be eligible for the ‘Rent a Room’ scheme. This scheme allows you to earn up to a threshold of £4,250 per year tax-free from letting out furnished accommodation in your home. You can let out a room or an entire floor of your home.
You can opt in to the ‘Rent a Room’ scheme at any time if you are a resident landlord or if you run a guest house or a bed and breakfast. It is worth remembering that you don’t have to be a homeowner to take advantage of this scheme. If you are a tenant yourself you can also lease out a room to a lodger, as long as your own lease allows you to do so.
If you do own your home you should check with your mortgage lender (if you have one) to ensure that you are allowed to rent out a room under the terms of your home loan.
How you can earn £4,250 without paying tax
If the income you receive from renting a room is less than the threshold (currently £4,250) then you are automatically exempt from paying tax on this amount. You do not have to complete a tax return.
If you earn more than the threshold then you must complete a tax return to declare the income. You will opt into the ‘Rent a Room’ scheme and claim your tax-free allowance via your tax return.
Bear in mind that the income (and the threshold) is halved if you share the income with your partner or someone else.
Two things to bear in mind
As well as the rent you charge for the room you may wish to also charge for services such as providing meals or laundry services.
Any income you receive from these services must be added to the rent you receive for tax purposes. If the total income from rent and other charges exceeds the threshold (currently £4,250) and your overall income is greater than the individual Personal Allowance, you will need to pay some tax.
Your responsibilities as a landlord are to keep the property safe and in good repair. Your tenant does not have the right to challenge the agreed rent and you don’t have to give as much notice to end a letting than if you rented out the property as a whole.