The cost of living crisis plus rocketing energy costs and limited government help is adding up to be a financial crisis for even what was the most stable of households. Therefore finding smart ways to increase household income to help with the bills is something many people are looking for.
One such method to bring in some extra cash to your coffers without upsetting your annual tax return is to rent out a room. Given that there is also a housing shortage in the UK and many people are taking jobs away from their home, there is certainly a demand for accommodation which could be to your advantage.
And the best news? You can earn up to £7,500 tax-free doing this. We’ll explain how it works…
Rent a Room Scheme
The Rent a Room Scheme is a government plan that allows landlords in the UK and Northern Ireland to earn up to £7,500 tax free per year by renting a room out in their home.
This includes Airbnb style rental where the property is rented out for a short time while the landlord is away as well as bed and breakfast type accommodation.
How to qualify for Rent a Room
To qualify, the property must be in the landlord's name and furnished
It must be part of your main home
You must be a resident landlord, but you might not actually own the property (so you will need to ensure you have the owners permission in case it contradicts your leasing agreement).
It is ok if you are temporarily away from the property but you cannot live overseas (ie it’s not ok if this is your ‘UK home’ but you are actually a resident overseas)
You run a Bed & Breakfast business or provide additional services (for example meals and cleaning/laundry)
Tax Exemption on Rent a Room
Any income from rent a room up to the £7,500 allowance does not need to be reported to HMRC - you are automatically exempt from paying any taxes on this income. However, any income above this amount must be reported via completing an annual tax return. Remember this is on top of your personal tax-free allowance so it really is a great way to make extra, legit, tax-free money.
If two or more people benefit from the rental income the allowance is halved, regardless of how many people share the income. So if you and a friend live together and rent your spare room out you each have an allowance of £3,250 - so as long as the total rental income between you isn’t more than £7,500/ £3,250 each you don’t need to tell HMRC or pay tax.
If the rental income is more than £7,500 you can either work out the profit by deducting expenses OR deduct the rent a room allowance from the rental income and pay tax on the difference. Ask us for advice on this when you are submitting your annual tax return.
The rent a room scheme does not affect capital gains tax. However, if there was more than one lodger at a time or all or part of the property has been let, there may be capital gains to pay if the property is then sold.
Renting out a room - getting started
You may already know someone looking to rent your room out, which is great. But if not, where do you start? You don’t want to end up spending a lot of money to advertise your property when the maximum tax-free income you can generate is £7,500. You could soon end up spending a good amount of that before you have made it! So here are a few tips to get you started:
Use a platform to market your property
AirBnB and Spareroom are platforms that you could use to advertise your property. Most take a fee but only once the room is let so the financial risk to you is minimal. The advantage of these is that there are also ID and safety checks though nothing is entirely guaranteed, so proceed with caution. Facebook is also an option to advertise your property.
Try Mon-Fri
If you would like to keep your weekends for just the family then it’s worth offering a Monday - Friday option as many people will rent a room to work away from home and return to their own home during the week. It’s less expensive than a hotel so a win-win for both parties.
Offer additional services
Meals and laundry are services you can charge extra for (it still counts towards your tax-free limit though).
Become a host
If you are interested in being a bit more than a key turner and bed maker then offering a homestay type of accommodation to international students could be just for you. It’s all about helping a young person feel at home in a foreign country, supporting them to learn English (through speaking it together at home) and generally being a bit of a surrogate away-from-home parent.
It’s very rewarding financially and personally. The process for becoming a host is a bit more robust than AirBnB for example but so is the support you receive. Start by contacting local language schools in your area for more information about becoming a host (and register with more than one!).
Need more information about the financial and tax implications of renting out a room in your home? Get in touch:
☎️TEL: 01480 775 611
📧hello@evolveaccounting.uk