Home sweet home: Taking advantage of the rent-a-room scheme

Sarah Bradford explains how to earn tax-free income from letting a furnished room in one’s home. 

The rent-a-room scheme was introduced to increase the supply of private furnished accommodation by offering tax incentives to those who let out a furnished room in their own home.  

Under the scheme, individuals can earn tax-free income of up to £7,500 a year. 

Who is eligible? 

The rent-a-room scheme can be used by individuals who let furnished accommodation in their own homes. Users can let out as much of their home as they want – but they must continue to live there too. The scheme can also be used by people whose letting activity constitutes a trade, such as those running a guest house or providing bed-and-breakfast accommodation. You do not have to be an owner-occupier to benefit from the scheme – you can also benefit if you rent your home; but you will need to check with your landlord whether you are able to sublet rooms. 

The scheme only applies where the accommodation is let furnished – you cannot benefit if you let an unfurnished room. Also, the accommodation must be part of your main home when you let it. The let accommodation cannot be used for business purposes or as an office. However, a lodger can work at home in the evening or at the weekend without compromising the availability of the scheme. The rent-a-room scheme can also be used to let rooms to students, and you can provide study facilities and still use the scheme. 

How the scheme works 

Under the scheme, if the gross rental income that you receive from letting furnished accommodation in your own home is less than the rent-a-room limit, you can enjoy that income tax-free and you do not need to tell HMRC about it. The exemption applies automatically and does not need to be claimed. 

The rent-a-room limit is set at £7,500, where one person receives the income. Where income is received by two or more people, each has a rent-a-room limit of £3,750, irrespective of how many people share the rental income. 

Gross rental receipts include rental income before deducting expenses, plus any amounts received for the provision of services (e.g., meals, cleaning and laundry) and also any capital allowance balancing charges. 

Where your letting activity amounts to a trade, your gross receipts are those for the basis period.  

Gross receipts more than rent-a-room limit 

You can still benefit from the scheme if your gross rental receipts are more than your rent-a-room limit. Where this is the case, you have a choice of how you calculate your taxable profit, and you can choose the method that is most beneficial to you.  

Method A: your taxable profit is calculated in the usual way (i.e., total receipts less deductible expenses and any capital allowances), and you pay tax on your actual profit. 

Method B: instead of deducting your actual expenses and capital allowances, you deduct the rent-a-room limit from your gross receipts.  

If your actual expenses and capital allowances are less than the rent-a-room limit of £7,500 or £3,750 (as applicable, depending on whether the receipts are shared), Method B will provide the best result.  

Example 1: A worthwhile saving 

Lottie lets out two spare rooms in her home to students and receives gross rental receipts of £12,000. Her associated expenses and capital allowances for the tax year amount to £1,000. 

Using Method A, Lottie will pay tax on her actual profit of £11,000 (i.e., £12,000 less actual expenses of £1,000). 

However, if she used Method B, she would only pay tax on £4,500 (i.e., £12,000 less the rent-a-room limit of £7,500). 

Clearly, Method B is preferable here as Lottie’s taxable profit of £4,500 is £6,500 less than her actual profit of £11,000. By opting to use the rent-a-room scheme, Lottie will pay £1,300 less in tax if she is a basic-rate taxpayer and £2,600 less in tax if she is a higher rate taxpayer – a worthwhile saving. 

HMRC will automatically use the actual profits (i.e., that calculated under Method A) to work out your tax liability, unless you tell HMRC you want to use Method B. Consequently, if Method B gives the best result, you must tell HMRC no later than one year from 31 January following the end of the tax year (i.e., by 31 January 2026 for 2023/24). 

Once you have opted to use Method B, it will continue to be used to work out your tax liability until you tell HMRC that you want to switch to Method A. 

However, if your gross receipts fall below the rent-a-room limit of £7,500 or £3,750 (as applicable), the rent-a-room exemption will apply automatically and you do not need to decide whether to use Method A or Method B. 

Do the sums each year  

If your gross receipts exceed the rent-a-room limit, you can switch between Method A and Method B to ensure that the method used gives the best result – having notified HMRC that you want to use Method B, you are not committed to using that forever and can switch back to Method A the following year if that produces a more favourable outcome.  

To switch to the other method, you need to tell HMRC within the time limit. If you do nothing, the existing method will continue to apply. It is vital, therefore, to ‘do the sums’ each year to see which method gives the best result. 

Example 2: Switching methods 

Matt lets out a furnished room in his home. 

In 2022/23, his gross rental receipts are £9,000, and his expenses are £2,000. 

In 2023/24, his gross rental receipts are £10,000. However, he undertakes some refurbishment works and incurs expenses of £1,500 and claims capital allowances of £8,000. 

The taxable profit for each year under each method is shown in the table below. 

For 2022/23, Method B gives the best result, producing a taxable profit of £1,500 compared to a taxable profit of £7,000 under Method A. Matt must tell HMRC by 31 January 2025 that he wishes to use Method B to calculate his taxable profit for 2022/23. 

For 2023/24, Method A produces the best result – a taxable profit of £500 compared to a taxable profit of £2,500 under Method B. If Matt does nothing, Method B will continue to apply. To benefit from the more favourable Method A result, he must tell HMRC that he wishes to switch to Method A by 31 January 2026. 

Losses 

The rent-a-room scheme is not beneficial if you make a loss. If your gross rental receipts are less than £7,500 (or £3,750 where at least two people benefit from the income), the exemption applies automatically. If there is a loss because expenses and capital allowances exceed gross receipts, the loss is lost and is not available to set against any future profits. Use of the scheme is not compulsory, and in this situation, it will be beneficial to opt out of the rent-a-room scheme to preserve the loss.  

To do this, you will need to tell HMRC about the income on your tax return and also that you do not want rent-a-room to apply. This will involve some administration, and where the loss is small or you do not envisage being able to utilise it in future, you may prefer to take the automatic exemption rather than the loss. 

You cannot create a loss under Method B. If you have an actual loss for a year and wish to preserve that loss, you will need to switch to Method A by telling HMRC within the required time frame. 

Moving home in the tax year 

If you move home during the tax year and let furnished accommodation in both your old and your new home, you will need to take into account the total gross receipts from both properties when working out whether the exemption applies. 

Practical tip 

The rent-a-room scheme offers the opportunity to earn tax-free rental income of up to £7,500 a year from letting a furnished room in your home. However, the scheme will not always be beneficial; it is important to do the sums each year.