Tax-Free Income from Renting a Room: How the Rent a Room Scheme Works

Letting a Room in Your Home: Tax Rules You Need to Know

With the rising cost of living, many homeowners (and even tenants) are looking at letting out a spare room to generate extra income. The good news is, the UK’s Rent a Room Scheme offers a tax-efficient way to do this — letting you earn up to £7,500 a year tax-free.

How the Rent a Room Scheme Works

• You can earn £7,500 per year tax-free from renting out furnished accommodation in your home.

• If more than one person benefits (for example, joint owners), the allowance is split — giving each person up to £3,750 tax-free.

• The property can be owner-occupied or rented, but the let must be furnished.

 Interesting point: if three or more people share the rent, the combined tax-free amount across individuals can exceed £7,500.

Do You Need to Report the Income?

• If your rental income is below the allowance, you don’t need to tell HMRC.

• If it’s above the allowance, you’ll need to file a Self Assessment tax return.

Working Out Your Taxable Profit

When your rental income is more than £7,500 (or £3,750 for joint owners), you have two options:

1. Use the Rent a Room Scheme

You simply deduct the allowance instead of actual costs.

• Example: You earn £8,000 from renting out a furnished room and spend £700 on expenses.

• Under the scheme: £8,000 – £7,500 = £500 taxable profit.

• Without the scheme: £8,000 – £700 = £7,300 taxable profit.
  Clearly, the scheme is more tax-efficient here.

2. Claim Actual Expenses

If your real costs are higher than the allowance, it’s better not to use the scheme. Instead, deduct your actual expenses to reduce your taxable profit.

What If You Make a Loss?

If your rental income is below the allowance but you’ve made a loss, opting out of the scheme and filing a tax return may be wiser. This way, you can preserve the loss to offset against future rental profits.

Key Takeaway

Letting out a room can be a smart way to earn extra income, and the Rent a Room Scheme can save you tax — but it’s not always the best choice. Compare your allowance with your actual costs to decide which option works for you.

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