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How the Rent a Room scheme works

This is an optional scheme that lets you earn a certain amount of tax-free income from renting furnished accommodation in your only or main home. This tax free amount is 'gross' income, that is, the total of your receipts before taking away your expenses. It doesn’t matter how much you earn from other sources – you still get the full tax-free amount.

If you're getting benefits you must report this change in your financial circumstances to your local benefit office.

• Changes that affect your benefit

Who can take advantage of the scheme?

You can choose to take advantage of the scheme if you let furnished accommodation in your only or family home to a lodger. Your only or family home is the one where you/your family live for most of the time. A lodger is someone who pays to live in your home, sometimes with meals provided, and who often shares the family rooms.

A lodger can occupy a single room or an entire floor of your home. However, the scheme doesn't apply if your home is converted into separate flats that you rent out. In this case you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax through Self Assessment. The scheme also doesn't apply if you let unfurnished accommodation in your home.

• Tax on rent from residential property lettings

Do you have to be a homeowner?

You can choose to take advantage of the Rent a Room scheme, regardless of whether you're a homeowner or are renting your home. However, if you are renting, you should check whether your lease allows you to take in a lodger.

If you're a mortgage payer it's best to check whether taking in a lodger is within your mortgage lender's and insurer's terms and conditions.

If you share a home and both let a room or rooms

If you both let furnished accommodation in your joint home, you'll each be entitled to receive half the allowance without paying tax. For the 2011-12 and 2012-13 tax years this is £2,125 each.

If you provide meals and laundry services

If you charge for additional services, you'll need to add the payments you receive to the rent, to work out the total receipts. If you get more than £4,250 a year in total, you'll have to report them and pay the tax by filling in a Self Assessment Tax Return even if the rent is less than that.

The advantages and disadvantages of the scheme

There are advantages and disadvantages of the scheme - it's simply a matter of working out what is best for you.

If you're in the Rent a Room scheme you can't claim any expenses relating to the letting (for example, wear and tear, insurance, repairs, heating and lighting) or losses.

You need to work out whether you're better off joining this scheme or declaring all of your letting income and claiming expenses on your tax return. To do this you need to compare the following:

For example John receives £8,000 a year for renting out a room and has expenses of £4,500. His profit is £3,500. The excess of his rent received over the rent a room limit of £4,250 is £3,750.

If you don't use the scheme you will pay Income Tax on the profit. If you do use the scheme you will pay tax on the excess of rent received over the rent a room limit. If you receive less than £4,250 (or £2,125 if you're letting jointly) you don’t have to do the comparison.

• Expenses and allowances on income from property

Rent a Room scheme and running a business

If you run a bed and breakfast business, guest house, or provide catering and cleaning services as part of a letting business, the scheme can still apply to you. You'll need to complete the relevant parts of the self-employment pages of your Self Assessment tax return. The helpsheet below has more detail on the scheme which will help non-traders too.

• Download information on 'Rent a Room relief for traders' (PDF, 72K) Opens new window

• Help with PDF files

How to opt in or out of the scheme

If you want to be part of the scheme

If you don't normally receive a tax return and your receipts are below the tax-free thresholds for the scheme, the tax exemption is automatic so you don't need to do anything.

If you wish to be part of the scheme and your receipts are above the tax-free threshold, you must tell HMRC. You can do this by completing a Self Assessment tax return and claiming the allowance.

If you don't want to be part of the scheme

If you don’t want to be part of the scheme you should complete a tax return within the usual deadline and declare the relevant lettings income and expenses on the property pages. You can choose not to be part of the scheme even if your rents are below £4,250 or £2,125.

• Contact HMRC - Income Tax enquiries for individuals, pensioners and employees Opens new window

Keeping records

Even though you can't claim expenses when you use the Rent a Room scheme, it may still be worth keeping proper records. You'll need them if you decide to opt out of the scheme at a later date.

More useful links

• Self Assessment - your tax return

Useful contacts

• Money, tax and benefits contacts