The Rent a Room Scheme is a government initiative that allows homeowners and tenants to earn tax-free income by renting out a furnished room in their main residence. This scheme is designed to encourage people to make better use of their spare rooms and provide affordable accommodation for lodgers.

Under the Rent a Room Scheme, you can earn up to £7,500 per year tax-free, or £3,750 if you're letting the room jointly with someone else. This threshold applies to the tax year, which runs from 6 April to 5 April the following year. If your rental income exceeds this threshold, you must complete a self-assessment tax return and pay tax on the excess amount.

To be eligible for the Rent a Room Scheme, you must meet certain criteria:

  1. The room you're renting out must be part of your main home, where you live most of the time.
  2. The room must be furnished, including basic furniture such as a bed, wardrobe, and chairs.
  3. You can rent out as much of your home as you like as long as it's your main residence.
  4. You can also use the Rent a Room Scheme if you run a bed and breakfast or guest house.

However, there are some situations where the Rent a Room Scheme isn't applicable:

  • If the room is unfurnished.

  • If the room is on a property different from your main home.

  • If the room is used solely for business purposes or as an office.

  • If you're renting out the room while living abroad.

One of the main advantages of the Rent a Room Scheme is that it provides an automatic exemption from tax if your rental income is below the threshold. This means you don't need to do anything, including informing HMRC, if you earn less than £7,500 (or £3,750 if letting jointly) per year from renting out a room.

If your rental income exceeds the threshold, you have two options when completing your self-assessment tax return:

  1. You can claim the Rent a Room Scheme tax-free allowance by selecting the appropriate option on your tax return. In this case, you'll only pay tax on the amount that exceeds the threshold.
  2. Alternatively, you can declare your rental income like any other landlord. You'll need to calculate your profit by deducting allowable expenses from your rental income and paying tax on the net profit.

Deciding whether to claim the Rent a Room Scheme allowance on your tax return depends on your circumstances. If your allowable property expenses (such as mortgage interest, repairs, and utility bills) are less than the Rent a Room Scheme threshold, it's generally more tax-efficient to claim the allowance. In this case, you won't need to use any property expenses in your calculations.

On the other hand, if your property expenses are higher than the Rent a Room Scheme threshold, it might be more beneficial to declare your rental income normally and deduct your expenses from your rental income.

It's important to keep accurate records of your rental income and expenses, even using the Rent a Room Scheme. This will help you determine whether you must complete a self-assessment tax return and pay tax on any excess income.

"Did you know that HMRC has the power to investigate and go back up to 20 years under COP9 if they find any undisclosed income? Any undisclosed income that has not been reported could result in significant consequences, including hefty fines and legal action. Therefore, it is essential to make sure that all your sources of income are accurately reported to avoid any potential issues with HMRC. Remember, disclosing your income is the right thing to do and ensures your peace of mind and financial security. You can disclose through HMRC Disclosure Services, or if you have a foreign income, you can use the World Wide Disclosure Facility."

The Rent a Room Scheme allows homeowners and tenants to earn tax-free income by renting a spare room in their main residence. However, it's important to understand the rules and keep accurate rental income and expense records. If you need clarification on any aspect of the Rent a Room Scheme, seeking advice from a property accountant nearby is always a good idea.