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A guide on the rent a room scheme

by | Nov 13, 2022

Introduction

Many people know the rent a room scheme is associated with having a lodger in a property. But what exactly does the legislation say? There is a range of agreements you can have with tenants and this is one of the most flexible agreements that also provides tax benefits. So read on to learn more about the topic.

What is the rent-a-room scheme?

The rent a room scheme incentivises homeowners to provide cheap accommodation to tenants by providing them with tax relief income from rental income up to £7,500. This relief is only there for those who live in the same accommodation they are introducing lodgers to and the income is calculated from one tax year to another.

Taxes being saved with the rent a room scheme

What is the rent a room relief?

The rent a room relief works by providing the landlord with a form of tax relief of up to £7,500 as long as they are following regulations. 

For more on the specific regulations of the rent a room scheme, click here, but here are some basic requirements. As a property owner introducing your home to lodgers, you must make sure that the room is furnished, you must also make sure you have permission from a landlord if you’re taking in a lodger as a tenant. This may already be written in a tenancy agreement.

In this case, the tenant will have to take responsibility for any rent arrears that happen as a result of the lodger not paying their rent. In addition, any damages that occur from a lodger will be the tenant’s responsibility unless this is stated otherwise in the tenancy agreement.

In addition to this, landlords and tenants will need to opt into the rent a room scheme by signing up with HMRC if their income exceeds this £7,500 amount. Otherwise, they will not have to do anything if their income is below this threshold and they can legally have a lodger within a property. As long as you sign them up to an appropriate lodging agreement and your home is considered safe by conducting things like gas safety checks and electrical safety checks.

It is important to note that a lodging agreement under the rent a room scheme is not a tenancy so while there has to be a safe home for a lodger, a landlord is not obliged to repair any part of the property if something breaks within their stay. It can also be written in a lodging agreement who is responsible for certain aspects of a home so there are no clear-cut rules like in a tenancy agreement besides basic safety regulations.

What is the maximum allowance for the rent a room scheme?

The max allowance for the rent a room scheme is £7,500. This refers to the maximum amount of tax-free income available. Any income above this is taxed at income tax rates and there is no maximum rent that can be charged. 

Can anyone apply to the rent a room scheme?

Any tenant or landlord with a spare room and a safe and furnished property can apply to the rent a room scheme and begin collecting rental income from lodgers. It doesn’t matter if a landlord is still paying off the mortgage for this home or if you own it outright.

You will need to ensure the property is electrically safe by providing an electrical safety certificate on the property every five years, gas safety check every year and an energy performance certificate every 10 years. 

Having said this, if the lease you sign with your lodger is longer than 7 years, then you will not need to provide electrical or gas checks to qualify for the rent a room scheme as these safety requirements will be transferred to the lodger.

A landlord applying to the rent a room scheme

How to opt-out of the rent a room scheme

To opt-out of the rent a room scheme. You shouldn’t just do nothing but instead rent the property as you would if there was a general assured tenancy in the property. This would be the best way to make sure that you pay the relevant taxes for your property and still let out the property legally.

How does it work if you share the house with a roommate?

Rental income will simply be split if you both agree to have lodgers in the property in the rent-a-room scheme and there are two roommates. This brings down the allowance of tax-free income to half of the £7,500 figure to £3,250. 

Interestingly within the rent a room scheme, for every person added to the property after two people, the property doesn’t start to split further and the total tax relief between all people starts to add up. 

For example, if there are three homeowners, they will all be able to split the rental income three ways and they will all start getting charged for tax at the same rate of £3,750. Increasing the total amount of tax-free income from the rent a room scheme in total.

Does the rent a room allowance include a holding deposit?

Whether you charge a deposit for the lodgers in your property as a landlord is completely up to personal preference and there are no rules around this to qualify for the rent a room scheme. It may be the case that you trust the lodger enough that you don’t feel the need to ask for a deposit.

Having said this, staying cautious even if you do think you trust a lodger is probably the best thing to do. Having agreements written down on paper and providing incentives for the lodger to keep the property in good condition like giving back a deposit could work in your favour.

If you do charge a deposit for a lodger which is typically one to one and a half months rent, it is useful to note a landlord won’t have to protect the deposit in a deposit protection scheme and you can collect it how you want. As long as you are always able to pay out the deposit within 28 days if a lodger decides to leave.

Is the rent a room scheme tax-free?

No, the rent a room scheme isn’t completely tax-free. It just charges tax in a different manner. In such a way that you won’t have to pay tax up to a certain amount of rent (£7,500). 

As a result, it is vital a tenant or landlord participating in the rent a room scheme follows the regulations as it is possible to owe rent to the government which could result in you having to pay back tax in the future with interest and potential fines that could have been avoided with further research.

What should you do if rental income exceeds the £7,500 rent-a-room limit

If the rental income from the lodgers in a property exceeds the tax-free limit, then you would have to start paying tax on the rest of this income from the rent a room scheme at the rate of income tax. As an example, the table below shows this clearly.

Rent a room scheme example
Calculation Amount
Rental income £12,000
Rent-a-room allowance – £7,500
Taxable income £4,500
Tax payable = £4,500 x 20% £900

Rent a room scheme example explained

Wrapping your head around these numbers can be a hard task, so here is the description of the table above on how tax is paid in the rent a room scheme. In this property, there are three bedrooms, one of which you live in, the other two you advertise as rooms to rent for a lodger. After these lodgers move in, they each will pay rent of £500 for each room.

As a result, the total amount of rent you collect is £1,000 per month (£500 x 2), which is £12,000 per year. Of this £12,000, £4,500 is over the amount of the tax-free threshold so you will pay tax on this based on your income tax threshold.

The basic rate of income tax for those earning between £12,571 and £50,270 is 20%. This means you will pay £900 of tax if you fall into this threshold. You can check here if you think your income exceeds this by looking at the government income tax rates.

Finally, it is worth noting that because the government grants £12,571 of personal income, if the lodging income is the only income you have, you will not need to pay any tax. However, most people will have some form of other income and they will also still need to declare this with HMRC because the income from the property is over £7,500.

It is worth paying attention to the fact that if the £11,100 the landlord of the property gets to keep (£12,000 – £900), they have to deduct any expense from this figure that isn’t a tax write-off. For example, having to furnish rooms for the lodgers or repair any damages caused by them.

Unlike a normal AST agreement, these expenses are tax deductible and they also won’t allow you to benefit from mortgage interest tax relief like if you were renting a property using buy to let interest only mortgage which is explained in detail here.

Can you claim rent-a-room relief on short rentals?

In general, lodging agreements in the rent a room scheme aren’t used for short-term agreements but there are instances where it can work. 

You just have to make sure you’re following the guidance set out by the government that states the home must be the primary residence of the tenant or the landlord. This means they cannot use a property as a holiday-style accommodation, not live there and benefit from the rent-a-room relief.

Other than this, there is no maximum amount of time that obliges you to sign a lodging agreement. As long as you remember to calculate the rental income over the tax year rather than a normal calendar year.

Cartoon showing how rooms can be rented in the rent a room scheme

Pros and cons of the Rent a Room scheme

The rent a room scheme may not be right for everyone as there are certainly drawbacks to the scheme as well. Despite the tax benefits, here is the rent a room scheme evaluated for its pros and cons.

Pros of the Rent a Room scheme

Of course, one of the biggest benefits of being in the rent a room scheme is you can earn £7,500 from rental income completely tax-free.

Another advantage of the rent a room scheme is it forces you to have lodgers in your property in order to make rental income and they must be in the same property as the landlord or tenant. As a result, they will be able to have company in the property. Perfect for those who feel like their home is empty.

Also, the addition of someone in the property helps improve security as now there are an extra set of eyes and more activity in the house so things like burglaries become less likely.

Finally, having a lodger in the rent a room scheme as opposed to a normal tenant in your house or even subletting the property allows you to evict them easily. This shouldn’t be taken advantage of but the process of getting rid of a lodger usually just involves giving them the notice to quit and having them leave within a week if they pay rent weekly or a month if rent is paid monthly.

Cons of the Rent a Room scheme

Any expenses to do with the letting aren’t tax deductible. This means any repairs, renovations or changes to your property you have to do as a result of bringing in lodgers to you would have to pay yourself as a homeowner and landlord. You will be taxed on the net rental income of a property under the rent a room scheme not the gross profit you make.

In addition, something that turns a lot of people away from the rent a room scheme and lodging agreements is they have to be within the landlord or tenants main place of residence. As a result, there is a limited amount of privacy you can enjoy.

In summary

The rent a room scheme should be looked into, especially for those who like the idea of casually renting out spare rooms in their property. It is also a common way to allow a landlord to pay off their mortgage easier by collecting additional income from the property they are paying off alongside working a normal job.

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Donnell Bailey property expert

Donnell Bailey

Property expert

Donnell is a property expert focusing on the property market, he looks at a combination of legislation, information from property managers, letting agents and market trends to produce information to help landlords.

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