Is the Rent a Room Scheme Right for You?

The Rent a Room scheme lets you earn up to £7,500 per year tax-free. Whether you're looking for a little extra income or have some space to spare, renting out a room might be the solution you've been waiting for.

How does the Rent a Room scheme work?

Beginning 6th April 2016, the Rent a Room scheme allows you to let out a furnished room or floor in your home to a lodger. Both landlords and resident landlords can take advantage of this optional scheme to earn up to £7,500 per year tax-free (or £3,750 if you are letting jointly).

The length of a let can either be periodic or a fixed term. Periodic tenancies run indefinitely from one rent period to the next. Fixed terms last a pre-established number of weeks, months or years.

How to register for a Rent a Room scheme

As long as your annual earnings remain less than the £7,500 threshold, your tax exemption is automatic. You'll have to pay tax on any surplus income you earn past the threshold, and that amount must be filed in your tax return.

Be aware that charging your lodger for extra services—such as providing meals or laundry services—must be recorded as part of your earnings.

For more information, please visit HM Revenue & Customs Rent a Room Scheme Guide.

Who's eligible for the Rent a Room scheme?

Here are the conditions for who's eligible for the Rent a Room scheme:

Eligible if the space you're letting is...	Not eligible if the space you're letting is...
A single room/floor within your main home	Your entire home, rather than a part of it
Furnished	Unfurnished
Considered part of a trade based on letting (e.g. guest house, bed & breakfast, etc.)	Used as an office or for other business unrelated to letting
	A secondary home, a home converted into separate flats, or a UK address while you live abroad.

Both home owners and resident landlords can take advantage of the Rent a Room scheme. You're classed as a resident landlord whenever you let out part of a property considered to be your main or only home. This means you can opt in to the Rent a Room scheme even if you're renting your home (provided your lease allows you to do so).

Things to consider before you opt in to the Rent a Room scheme

Before you decide to opt in to the Rent a Room scheme, stop to consider whether or not letting your home is a good fit for you. If you're not used to living with a lodger, having someone else live in your home may take some adjustment.

You'll also need to check to see if you're allowed to take on an additional lodger. If you're renting, make sure it doesn't violate your lease conditions. Likewise, if you own the property and have a mortgage, you'll need to check the terms of your mortgage contract and home insurance. There's a possibility you'll need different insurance all together, depending on your circumstances this could be Landlord Insurance or Lodger Insurance.

When you're sure that you can legally opt in to the Rent a Room scheme, take some time to weigh up the scheme's pros and cons. For example, the obvious pro is you can earn up to £7,500 per year absolutely tax-free.

However, the flip side of this is that you cannot claim any additional expenses related to the letting . Under the Rent a Room scheme, you won't be able to deduct any expenses for general wear—such as replacing a broken-down boiler or worn carpets.

It's your choice whether or not the Rent a Room scheme's tax-free income is worth the trade-off with your additional expenses, but with some quick calculations, you'll be able to tell whether opting in or opting out is more beneficial.

How to find a lodger for the Rent a Room scheme

If you decide the scheme is right for you and you don't yet have a lodger yet, check out our video for some guidance:

Landlords insurance from Towergate

We provide landlord insurance for a wide range of properties and tenants including multi occupancy, students, local authority placements, unoccupied and much more. See our landlord insurance page.

About the author

Alison Wild Bcom Hons MAAT MATT Taxation Technician Commercial Tax Pensions Insurance And Marketing Specialist Author Alison Wild BCom (Hons), FMAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has over 20 years' experience as a residential landlord.