If you rent out a spare room, the rent a room scheme might automatically apply, so long as you meet the following criteria:
You must be living in the UK while you let the room
The room you let out must be furnished
The room must be in the main part of your main home when you let it
The room can’t be used as an office or for any business, although you can still use the scheme if your lodger works in your home in the evening or at weekends, or is a student.
If you meet the eligibility criteria and you earn £7,500 or less through your rental income, there is nothing you need to do, the scheme will automatically apply and you can essentially treat this income as a tax-free allowance. One catch is if you already fill out a tax return, you will need to include this rental income on your tax return, but you will still be able to claim it tax-free.
If you earn more than £7,500 in income from renting out your spare room, you will need to fill out a tax return detailing this and then you can either:
Opt into the rent a room scheme, claim your tax-free allowance on your tax return and then pay the additional tax you owe on the remaining profit
Choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.
The amount of tax you need to pay on any profit you make over £7,500 will depend on which income tax bracket you fall into.
So for example, let’s say that you rent out a room for £9,000 a year, but your expenses are £2,000 a year and you pay the 20% basic rate of Income Tax.
Option 1: You opt into the rent a room scheme and so would pay Income Tax on any rent you get that is above the £7,500 limit, which is £1,500. So your tax bill on your rental income would be £300 (20% of £1,500).
Option 2: You opt out of the scheme and so you can claim tax relief for all of your expenses, but you would lose the scheme’s £7,500 tax-free element. This would mean paying 20% Income Tax on £7,000 (the rent of £9,000 minus the expenses of £2,000), which comes to a much higher total of £1,400.