Got a spare room? Everything you need to know about the Rent a Room

If you’re lucky enough to have a spare room, don’t mind company and need a little spare cash, you could make around £590 a month by taking in a lodger. 

The latest SpareRoom UK Rental Index shows the average rent on a room in the UK now sits at £590 a month, though in London a room can rent for a significant £725. 

And with the government allowing you to earn up to £7,500 a year tax-free from a lodger via the Rent a Room scheme – for many, it could prove a financial lifeline.

You don’t even have to be the owner of the property to take advantage, although you will need to get permission from your landlord.

The average room rent in the UK costs £590pm according to the SpareRoom UK Rental Index

The average room rent in the UK costs £590pm according to the SpareRoom UK Rental Index

The average room rent in the UK costs £590pm according to the SpareRoom UK Rental Index 

Matt Hutchinson, director of SpareRoom, said: ‘After the last economic crisis we saw homeowners taking in lodgers as a way to help them out financially, and we expect to see this happen again over the coming months and even years. 

‘Taking in a lodger can be a great way to make some extra cash – and the government’s Rent a Room scheme, something SpareRoom campaigned for for six years to get the tax-free threshold up to its current level, is a brilliant incentive for homeowners.’

This is Money takes a look at the ins and outs of the scheme and the practicalities of letting out your spare room so you are in the best possible position to reap the rewards on offer.

What is the Rent a Room scheme? 

The government’s Rent a Room scheme is open to anyone who has a spare room in the home that they live in and wants to to let it to a lodger. 

A lodger is someone who rents a room in your home without having exclusive rights to any other part of the property – though typically shares common living areas such as the kitchen and bathroom. 

The scheme allows you to earn a tax-free income of up to £7,500 per year, or £3,750 each if you are letting jointly with another person. 

If you earn more than the threshold, you’ll have to complete a tax return and choose to opt into the scheme to claim your tax-free allowance. 

You can also opt out – which means you won’t get the £7,500 tax relief, but you can claim some expenses which may work out better for you.  

According to SpareRoom, the amount of rent charged for the average room in the UK between April and June 2020 was £590, down by two per cent compared to the same period in 2019

According to SpareRoom, the amount of rent charged for the average room in the UK between April and June 2020 was £590, down by two per cent compared to the same period in 2019

According to SpareRoom, the amount of rent charged for the average room in the UK between April and June 2020 was £590, down by two per cent compared to the same period in 2019

What you need to know before getting a lodger 

Most homeowners and council tenants can take in a lodger, so long as they have a spare room and can provide use of communal areas and facilities.

Generally speaking it’s easier to evict a lodger than a tenant, but you’ll need to give them ‘reasonable notice’ and it is recommended that you get a lodger agreement that is discussed, agreed on and signed in advance.

Unlike landlords who have tenants, as of yet, someone who takes in a lodger does not need to comply with tenancy deposit laws. 

You will have to perform a ‘right to rent’ check to see if the lodger is legally allowed to live in the UK. You’ll need to make and keep copies of the relevant documents and record the date you made the check.

You can find a lodger relatively easy these days with websites such as Spareroom, Roomgo and Gumtree, among others. 

Should you opt in or out of the scheme?

Taking in a lodger doesn’t mean you have to opt into the scheme, which may well be more tax-efficient in the long-run. It will depend on what other income you earn and your other financial affairs. 

As a general rule of thumb, if your expenses amount to £7,500 or more, then you’re better off opting out of the Rent a Room scheme 

A tax accountant is best placed to help you work out how best to structure your finances for these purposes. 

However, broadly speaking, if your income from the let is £7,500 or more, you have two options:

1. Opt out: Pay tax on your actual profit from the property (which is calculated as income received minus allowable expenses)

2. Opt in: Pay tax on the gross (before tax) income minus the £7,500 tax-free threshold, but with no allowance for expenses  

For example, if you charge a lodger £600 per month for rent, and £150 per month for bills, total income for a full 12 months would be £9,000 (£7,200 rent plus £1,800 bills, or expenses).

Allowable expenses 

 Letting agent’s fees 

Legal fees for lets of a year or less, or for renewing a lease for less than 50 years

Accountants fees 

Buildings and contents insurance 

Interest on property loans 

Maintenance and repairs (but not improvements) 

Utility bills 

Rent, ground rent, service charges 

Council tax 

Services you pay for, such as cleaning 

Direct costs of letting the property, e.g. phone calls, stationery and advertising 

With option one, at a basic rate of income tax you would pay 20 per cent tax on the rent only which is £1,440. You can claim tax relief on any expenses as long as you file your receipts along with your tax return.

With option two, as a basic income tax payer, you would pay 20 per cent on the whole amount, less the £7,500. In this case, you would be taxed on £1,500, and would have to pay just £300. 

As a general rule of thumb, if your expenses amount to £7,500 or more, then you’re better off opting out of the scheme (option one). 

Keep track of your receipts as, for any one year, your expenses may amount to more than £7,500, meaning you’d be better off opting out of the scheme.  

You can switch in and out from year to year, but must do so within the specified time limit and you must let HMRC know. The current time limit is five days less than 22 months from the end of the tax year.    

Pre-room letting checklist 

Before taking a lodger in, you should make the following necessary checks, though they do not affect your ability to opt in or out of the Rent a Room scheme. 

If you have a mortgage on your property, you will need to check with your lender to make sure you’re allowed to rent out a room under the terms of the mortgage contract.

You will also need to check this is allowed under the terms of your home and contents insurers as it may affect the cover and/or premium.

You don’t have to be a homeowner to use the scheme but if you lease out a room to a lodger while you are a tenant, you must make sure your own lease allows you to do and that your landlord is made aware and is comfortable with it. 

If you live on your own and therefore take advantage of the 25 per cent single person council tax reduction, you will no longer qualify for the discount if you decide to let out your spare room. Make sure you let your council know.

If you are getting means-tested benefits, contact the relevant bodies to let them know about your changed income. 

You’ll also need to get an annual gas safety check and furniture and furnishings must meet safety standards. It’s also a good idea (though not essential) to get electrical equipment PAT-tested. 

What if I have another spare room? 

If you’re even luckier and have more than one spare room, then you can have more than one lodger. Of course this would mean more income and also paying more tax. 

Keep an eye on your income and make sure you take the necessary steps to declare it and pay any tax if it goes above £7,500 in any tax year.

Be aware that any more than two lodgers will make your house a House with Multiple Occupation (HMO) so will then need to comply with a range of extra health and safety requirements. 

The Rent a Room scheme also applies if your letting activity amounts to a trade, for example, a guest house via Airbnb, or if you run a bed and breakfast business. 

For more information visit the official Government website

When to do your tax return 

If your income from letting your spare room to a lodger does not exceed £7,500 within the tax year, you do not need to fill a tax return.

However, you will need to declare the income if you already submit a tax return, if you are self-employed, for example. 

If you need to submit a tax return, then you will need to do this for the tax year in question by the July in the following tax year. 

For example, income and tax relief must be declared by July 2021 for the tax year 2020/2021. 

It can be done as early as April, when the new tax year commences.

You must let HMRC know within one year of 31 January following the end of the tax year if you: 

  • Want to stop using the scheme when your receipts are below £7,500, or £3,750, for example, if you want to claim losses
  • Want to start or stop paying tax on your gross receipts over the Rent a Room limit
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