How does the GBP 7,500 Rent a Room Scheme work?

Full answer

The Rent a Room Scheme is a tax relief that allows an individual to receive up to GBP 7,500 a year in rent, tax-free, from letting out furnished accommodation in the home they live in. It covers a lodger renting a room, and can also cover bed-and-breakfast or guest-house income from your main residence. The GBP 7,500 figure is the gross receipts (rent plus any charges for meals, cleaning or laundry), not profit. Who it affects: owner-occupiers and tenants (with their landlord's permission) who take in a lodger, provided the accommodation is part of their only or main home and is furnished. It does not apply to rooms let as an office or to a property let while you live elsewhere. How the thresholds work: if your total receipts are GBP 7,500 or less in the tax year, the income is exempt automatically - you do not even need to tell HMRC. If receipts exceed GBP 7,500, you must complete a Self Assessment return and choose between two methods. Method A is the ordinary approach: pay tax on your actual profit (rent minus allowable expenses). Method B uses the scheme: pay tax on the amount above GBP 7,500, with no deduction for expenses. You pick whichever gives the lower taxable figure. Worked example: you receive GBP 10,000 in rent with GBP 1,500 of expenses. Method A taxes GBP 8,500 of profit. Method B taxes GBP 10,000 minus GBP 7,500 = GBP 2,500. Method B is far better here, so you would elect for it. If you owned the home jointly and both letting, the allowance halves to GBP 3,750 each. The tax you then pay on any taxable amount depends on your marginal rate (20%, 40% or 45%). Use an income tax or self-employed tax calculator to estimate the bill on the taxable portion.

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