TLDR (too long didn’t read):
- The Rent a Room Scheme allows UK homeowners and tenants to earn up to £7,500 per year tax-free by letting out furnished accommodation in their main home.
- If you share the income with someone else, the threshold is £3,750.
- The scheme is automatic if your earnings are below the threshold, but you must complete a tax return if you exceed it.
- This guide explains how the scheme works, eligibility criteria, tax implications, and answers common questions.
What is the Rent a Room Scheme?
The Rent a Room Scheme is a UK government initiative that allows individuals to earn tax-free income by renting out furnished accommodation in their main home. For the tax year 2024 to 2025, the annual tax-free threshold is £7,500. If you share the income with someone else, such as a partner or co-owner, the threshold is halved to £3,750.
Who can use the scheme?
You can use the scheme if:
You let a furnished room to a lodger in your main home. You run a bed and breakfast or guest house, providing services like meals and cleaning.
You cannot use the scheme if:
The accommodation is not part of your main home. The room is unfurnished. The room is used as an office or for business purposes. You let the room while living abroad.
How does the tax-free threshold work?
If your gross receipts (total income before expenses) from letting are less than £7,500 (or £3,750 if shared), you are automatically exempt from tax on that income. If your receipts exceed the threshold, you can choose between two methods to calculate your tax:
Method A:
Pay tax on your actual profit (total receipts minus expenses and capital allowances).
Method B:
Pay tax on your gross receipts over the Rent a Room limit (gross receipts minus £7,500 or £3,750). You cannot deduct any expenses or capital allowances if you choose this method.
You can switch between methods each year, but you must inform HMRC by 31 January following the end of the tax year.
How to opt in or out of the scheme
If your income exceeds the threshold and you wish to opt into the scheme, you can do so by completing the relevant section on your Self Assessment tax return. If you prefer to pay tax on your actual profits (Method A, see above), you can opt out by notifying HMRC within the same timeframe.
What counts as gross receipts?
Gross receipts include:
• Rental income before expenses.
• Payments for meals, goods, and services like cleaning or laundry.
• Any balancing charges
Can I use the scheme if I move home?
Yes. If you rent out a room in both your old and new homes during the same tax year, you need to add together the total rent received. If the combined gross receipts are below the threshold, you remain exempt from tax
FAQs
Yes, you can let out as much of your home as you want under the scheme. However, the tax-free threshold remains the same
If you make a loss and want to claim it, you must opt out of the scheme and pay tax on your actual profits (Method A). This allows you to carry forward losses to offset against future profits
No. The scheme is only applicable if the room is in your main home and you live there while letting it out.
No. The tax exemption is automatic if your income is below the threshold. However, if you choose to opt out of the scheme, you must inform HMRC by 31 January following the end of the tax year.
Need Assistance?
Understanding the Rent a Room Scheme can be beneficial for purpose-led business owners looking to maximise their income. If you need help determining the best tax method or have questions about eligibility, our friendly team are here to assist. Contact us for personalised advice, or click here to find out more about our Tax Planning Services that help you make informed decisions to optimise your financial strategy.
