HMRC has confirmed that the Rent a Room scheme can increase your tax-free personal allowance to £20,070. Under Labour Party government rules, the standard income tax personal allowance remains £12,570, but by taking in a lodger, you can earn up to £7,500 per year tax-free, effectively raising your total allowance.
How the Rent a Room Scheme Works
The scheme allows you to let out furnished accommodation in your home without paying tax on rental income up to a threshold of £7,500 per year. If you share the income with someone else, the threshold is halved to £3,750. According to HMRC, the tax exemption is automatic if you earn less than your threshold, meaning you do not need to do anything.
If your gross receipts exceed the threshold, you must complete a tax return and can opt into the scheme to claim your tax-free allowance. Alternatively, you can record your income and expenses on the property pages of your tax return.
Eligibility and Exclusions
You cannot use the scheme if the accommodation is not part of your main home when let, or if it is not furnished. It also cannot be used if your home is used as an office or for any business. However, the scheme does apply if your lodger works in your home in the evening or at weekends, or is a student provided with study facilities. It also applies if your UK home is let while you live abroad.
Your gross receipts include rental income before expenses, as well as any amounts received for meals, goods, services such as cleaning or laundry, and any balancing charges. Gross receipts are counted for the tax year from 6 April to 5 April. If your letting activity amounts to a trade, you count gross receipts for the tax year.
