Rent a Room scheme – how it works and tax rules

Who is eligible for the Rent a Room scheme?

The Rent a Room scheme is available to individuals who own or rent a furnished accommodation and choose to let out a room to a lodger in their primary residence.

This scheme allows you to earn up to £7,500 per year tax-free if you're the sole landlord, or £3,750 if you're letting jointly.

It's not a requirement to be a homeowner in order to participate in the scheme. Even if you're renting your home, you can still let out a room to a lodger, provided that your lease permits subletting.

Opting in or out of the scheme

If the income you receive from renting out a room is below the Rent a Room scheme thresholds, you automatically qualify for tax exemption, and no further action is necessary.

If your earnings exceed the threshold, you must complete a tax return, regardless of whether you typically do so or not. At this point, you have two options:

1. Opt into the scheme: If you choose to opt into the Rent a Room scheme, you need to indicate this on your tax return and claim your tax-free allowance from HM Revenue & Customs.
2. Not opt into the scheme: If you decide not to participate in the scheme, you simply need to record your rental income and associated expenses on the property pages of your tax return.

If you don't usually receive a tax return but now require one, you can request it from HM Revenue & Customs through the provided link.

There is no specific form for notifying HM Revenue & Customs of your decision not to participate in the scheme. If your income exceeds the threshold or if you already file a tax return, you should declare the relevant rental income and expenses on your tax return.

The Rent a Room scheme and benefits

The Rent a Room scheme can be an excellent way to supplement your income while offering lodging. However, it's important to note that the income you receive may impact certain means-tested benefits.

Universal Credit and the Rent a Room scheme

If you're receiving Universal Credit, the money you earn from sub-tenants and lodgers under the Rent a Room scheme will not be considered as income up to the tax-free allowance of £7,500. This makes it a beneficial method to enhance your income without affecting your Universal Credit entitlement.

Council Tax Reduction and the Rent a Room scheme

If you were living alone and eligible for the 25% single person Council Tax Reduction but decide to rent out a room, you will no longer qualify for the discount.

Housing Benefit and the Rent a Room scheme

For working-age social housing tenants, how the Rent a Room scheme affects your Housing Benefit depends on how the person renting the room is classified:

1. Boarders: If you provide prepared food along with the room, the renter is classified as a boarder. The first £20 of rental income per week is disregarded, along with half of the remaining rent amount you receive. For instance, if the rent is £50 a week, £20 is automatically disregarded, and £15 of the remaining £30 rent payment is taken into account as income. This may affect the amount of Housing Benefit you receive.

2. Sub-tenants: If you only provide a room without meals, the lodger is considered a sub-tenant. The first £20 of rental income per week is still disregarded, but the remaining amount is considered as income. In this scenario, if the rent is £50 a week, £20 is disregarded, but the remaining £30 is seen as income and could impact the amount of Housing Benefit you receive.

If you claim Housing Benefit and rent out your only spare room, you will not be affected by the bedroom tax. However, if you have additional spare rooms, you may be subject to the bedroom tax.

Other means-tested benefits and the Rent a Room scheme

If you receive other means-tested benefits such as Income Support or Pension Credit, any income you earn from renting out your room could affect the calculation of these benefits.