If you are looking for ways to increase your household income you may consider renting out a spare bedroom.  The rent-a-room scheme, which was introduced in 1992, is an optional tax-exemption scheme that allows people to receive gross tax-free income of £4,250 each year from renting out a spare room in their home.

The relief

Broadly, the income tax relief is available to anyone who rents out furnished living accommodation in their main residence.  A lodger will typically have a furnished bedroom and share the family rooms.  More than one room in the home may be let, provided that each room qualifies for the relief.

While there are circumstances where the rent may include provision of meals, cleaning, laundry etc, taxpayers should be careful that these activities do not convert the activity to one of running a Bed and Breakfast as HM Revenue and Customs may treat the income as income from a trade and deny rent-a-room relief.

The options

The £4,250 annual tax allowance equates to around £80 per week and often lodgers pay more than this, especially in the city centre. For tax purposes if the homeowner receives more than the annual exempt amount they can elect for one of two options to apply to them.

Under the first option, the homeowner counts the first £4,250 of rent as a tax free allowance and pays income tax on the balance.

If this first option is chosen, the landlord will have to keep a record only of the income since no claim for any expenses will be made (the £4,250 relief applies to gross income and not income after expenses).

Under the second option, if it is more beneficial, the homeowner can treat the rental income in the same way as normal rental income and calculate the net taxable amount remaining after the expenses of letting the room are deducted from the rental income itself.

A landlord has one year after the end of the tax year in which the income exceeded £4,250 to decide which option to take.  Consideration should therefore be given as to which route produces the lowest tax bill.

The exceptions

The relief does not apply if the taxpayer also rents unfurnished rooms in the same property in the same year.  In addition rent-a-room cannot be claimed where the property ceased to be the taxpayer’s home before the letting period began.  The relief is also unavailable where the property only became the taxpayer’s accommodation after the letting ceased.

Taxpayers who let rooms while they are working abroad or living in job-related accommodation cannot claim rent-a-room relief unless the room is already let before they move for employment purposes and relief does not extend to the letting of rooms as office accommodation.

The limits

The qualifying limit depends on the number of people entitled to the income.  If only one person is entitled to the income the limit is £4,250 but if two people are jointly entitled to the income each is entitled to relief of half that amount (£2,125).  Where more than two people are jointly entitled to the income, each is entitled to relief of £2,125.

Other considerations

Anyone considering renting out a room in their home must ensure that they consult with their insurers and mortgage providers and if you rent your own home make sure the lease allows you to take in lodgers.

If you have a bedroom lying empty in your property this could serve as a way to increase your household income without necessarily incurring any additional income tax.