The Rent A Room scheme is a valuable way in which those who let a room in their house may be able to cut their tax bill.
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So what is the Rent A Room scheme, and how much could you save?
What is the Rent A Room scheme?
The Rent A Room scheme is a tax relief available to those letting out furnished accommodation in their home. It allows these individuals to earn a set amount each year free of tax from renting out a room.
How much can I save under the Rent A Room scheme?
The Rent A Room scheme allows you to take the first £7,500 tax free, provided it’s earned through letting furnished accommodation in your own home.
The exact tax saving will depend on factors such as the tax bracket that you’re in, but it is an attractive relief for those letting a room.
The relief is also available if the letting amounts to a trade. The most common example of this is a bed and breakfast.
However, you can’t claim the Rent A Room relief if the accommodation is not in your main home, is not furnished, or is used for any business purposes. You also can’t claim the relief if the accommodation is in your UK home and it is let while you live abroad.
How do I register for the Rent A Room scheme?
The Rent A Room tax exemption is applied automatically if you earn less than £7,500 per year letting out your room. This means that you don’t need to do anything in order to claim it, and you don’t need to register.
However, if you earn more than that threshold, you’ll need to complete a Self Assessment tax return. You then have two options: you can opt in to the scheme on the form, or you can choose not to opt in and instead use the property pages of the tax return to record your income and expenditure.
You should think carefully about which option you choose, as there will be tax implications.
You should also remember that you must complete your Self Assessment and pay your bill by the deadlines. You can read more in our guide to landlord Self Assessment tax returns.
What if I earn more than the Rent A Room scheme threshold?
If your earnings exceed the Rent A Room threshold, you can choose how you work out your tax. You can either:
- pay tax on your total profits
- or pay tax on your gross income over the Rent A Room threshold. If you use this method, you can’t deduct expenses or capital allowances.
By default, HMRC will use the first method to calculate your tax. If you want to use the second method instead, you need to tell them.
Do you use, or are you considering using, the Rent A Room scheme? Let us know about your experiences in the comments below.