The rent a room relief scheme is a great way to make some tax-free income. This has the triple benefit of increasing the amount you earn through renting out a room, is tax-free, and also increases your ‘salary’ so you can borrow more from the banks when getting a mortgage.

I discovered this from my good friend Patrick over at ThePropertyStarter. Patrick is a buy-to-let investor. Definitely check out his blog for a lot of great property posts!

In this post, we’ll be looking into the rent a room relief scheme in detail, its benefits, as well as some real examples of how to calculate the relief, and whether you should elect to use it or not. 

With anything, make sure you have set some goals first!

Basics Of Rent A Room Relief

From the government’s website, the Rent A Room Relief scheme:

…lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.

In layman’s terms, you rent out a room in your home and can earn some tax-free income! If you share a home with people, each person has an allowance of £3,750, even if there are 3 or more owners.

It’s important to note that the limit is £7,500. This works out to be £625 per month. Anything over this is not tax-free and will be taxed at the income tax rates. Whilst earning more is always great, if you do go over the £7,500 threshold you’ll have to submit a tax return, which if you don’t do already, will create some additional admin work for you. 

The good news is, if you earn £7,500 or less, then it is tax-free and no paperwork!

The rent a room relief scheme is a great way to make some tax-free income. This has the triple benefit of increasing the amount you earn through renting out a room, is tax-free, and also increases your ‘salary’ so you can borrow more from the banks when getting a mortgage.

I discovered this from my good friend Patrick over at ThePropertyStarter. Patrick is a buy-to-let investor. Definitely check out his blog for a lot of great property posts!

In this post, we’ll be looking into the rent a room relief scheme in detail, its benefits, as well as some real examples of how to calculate the relief, and whether you should elect to use it or not. 

With anything, make sure you have set some goals first!

Basics Of Rent A Room Relief

From the government’s website, the Rent A Room Relief scheme:

…lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.

In layman’s terms, you rent out a room in your home and can earn some tax-free income! If you share a home with people, each person has an allowance of £3,750, even if there are 3 or more owners.

It’s important to note that the limit is £7,500. This works out to be £625 per month. Anything over this is not tax-free and will be taxed at the income tax rates. Whilst earning more is always great, if you do go over the £7,500 threshold you’ll have to submit a tax return, which if you don’t do already, will create some additional admin work for you. 

The good news is, if you earn £7,500 or less, then it is tax-free and no paperwork!

rent a room relief
rent a room relief

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Calculation

If the income you earn from renting out a room in your home is >£7,500, there are two ways to work out your property income for your income tax calculation. 

    1. Rent A Room Relief Allowance
    2. Normal Calculation

The first way is using the £7,500 allowance:

Rent A Room Relief Allowance

Rental Income                     X

Rent A Room Relief        (7,500)

Property Income                 X

This property income is then taxed.

The second way is by calculating your taxable income in the normal way:

Normal Calculation 

Rental Income              X

Less Expenses              (X)

Property Income           X

This property income is then taxed.

Some Examples

Importantly, you can choose whether to make the rent a room relief election or not. We know from above that there are two ways to calculate your property income. So, as you may have thought already, you only want to make the election if you will end up paying less tax.

For example, let’s say you own a flat in London and rent out a room for £650 per month, and you have expenses of £635 per month. You can work out your taxable income by using the normal calculation:

Normal Calculation

Rental Income             £650*12 = £7,800

Less Expenses            £635*12 = (£7,620)

Property Income          £7,800 – £1,400 = £180

You will then be taxed on this £180.

Or you can choose to elect to use the rent a room relief allowance:

Rent A Room Relief Allowance

Rental Income                  £650*12 = £7,800

Rent A Room Relief        (7,500)

Property Income               £300

You will then be taxed on this £300.

In this example, as you have earnt more than £7,500, you can choose whether to use the allowance or not.

In this example, what would you do?

When To Elect To Use Rent A Room Relief

As you may have worked out from the above example, when your expenses are greater than the allowance of £7,500, it makes more sense not to elect to use it.

From above, where expenses worked out to be £7,620 per year, we ended up having a lower property income and so a lower tax bill without electing to use the rent a room relief allowance.

If you earn <£7,500 you are automatically opted in.

If you earn more than £7,500 you can choose whether to opt-in and this will result in you having to complete a tax return. Run the numbers for yourself, and only opt-in to the rent a room relief scheme if you will end up paying less tax.

The most preferable option is where you have less taxable income!

Calculation

If the income you earn from renting out a room in your home is >£7,500, there are two ways to work out your property income for your income tax calculation. 

    1. Rent A Room Relief Allowance
    2. Normal Calculation

The first way is using the £7,500 allowance:

Rent A Room Relief Allowance

Rental Income                     X

Rent A Room Relief        (7,500)

Property Income                 X

This property income is then taxed.

The second way is by calculating your taxable income in the normal way:

Normal Calculation 

Rental Income              X

Less Expenses              (X)

Property Income           X

This property income is then taxed.

Some Examples

Importantly, you can choose whether to make the rent a room relief election or not. We know from above that there are two ways to calculate your property income. So, as you may have thought already, you only want to make the election if you will end up paying less tax.

For example, let’s say you own a flat in London and rent out a room for £650 per month, and you have expenses of £635 per month. You can work out your taxable income by using the normal calculation:

Normal Calculation

Rental Income             £650*12 = £7,800

Less Expenses            £635*12 = (£7,620)

Property Income          £7,800 – £1,400 = £180

You will then be taxed on this £180.

 

Or you can choose to elect to use the rent a room relief allowance:

Rent A Room Relief Allowance

Rental Income                  £650*12 = £7,800

Rent A Room Relief        (7,500)

Property Income               £300

You will then be taxed on this £300.

 

In this example, as you have earnt more than £7,500, you can choose whether to use the allowance or not.

In this example, what would you do?

When To Elect To Use Rent A Room Relief

As you may have worked out from the above example, when your expenses are greater than the allowance of £7,500, it makes more sense not to elect to use it.

From above, where expenses worked out to be £7,620 per year, we ended up having a lower property income and so a lower tax bill without electing to use the rent a room relief allowance.

If you earn <£7,500 you are automatically opted in.

If you earn more than  £7,500 you can choose whether to opt-in and this will result in you having to complete a tax return. Run the numbers for yourself, and only opt-in to the rent a room relief scheme if you will end up paying less tax.

The most preferable option is where you have less taxable income!

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Another Benefit Of Rent A Room Relief

We’ve already seen that by using rent a room relief you are able to earn some tax-free money, but a further benefit is that by using the allowance you ‘increase’ your income.

When getting a mortgage, you can usually borrow 4-5x your salary. Particularly when buying in London or other cities, the amount you can borrow can greatly constrain your borrowing potential.

Now, this is where you will need to speak to the lender/broker to make sure they are happy with this, but if you can show this £7,500 will be made, then this can be added to your income, increasing your income, so you can borrow more!

This extra £7,500 in income can make all the difference!

An Example

For example, let’s say you earn £30,000. You will be able to borrow in the region of £120,000 – £150,000.

But, if you rent out a room and elect to use rent a room relief, your income has now just jumped up to £37,500. Meaning now, you will be able to borrow in the region of £150,000 – £187,500. The old higher boundary, is now the new lower boundary! 

This means you might be able to secure a house with an extra bedroom, or with a garden, or in a slightly nicer area.

Make sure you speak to a professional first to ensure you’re able to use the rent a room income to increase your borrowing.

Final Thoughts

Personally, we think this is a great scheme which allows us to increase our income to borrow more, and earn some tax-free money.

Another benefit we haven’t even mentioned yet is that by renting out a room you are getting a lodger to pay your mortgage down for you! 

We hope this post even you aware, or made you more informed, of the rent a room relief scheme.

Another Benefit Of Rent A Room Relief

We’ve already seen that by using rent a room relief you are able to earn some tax-free money, but a further benefit is that by using the allowance you ‘increase’ your income.

When getting a mortgage, you can usually borrow 4-5x your salary. Particularly when buying in London or other cities, the amount you can borrow can greatly constrain your borrowing potential.

Now, this is where you will need to speak to the lender/broker to make sure they are happy with this, but if you can show this £7,500 will be made, then this can be added to your income, increasing your income, so you can borrow more!

This extra £7,500 in income can make all the difference!

An Example

For example, let’s say you earn £30,000. You will be able to borrow in the region of £120,000 – £150,000.

But, if you rent out a room and elect to use rent a room relief, your income has now just jumped up to £37,500. Meaning now, you will be able to borrow in the region of £150,000 – £187,500. The old higher boundary, is now the new lower boundary! 

This means you might be able to secure a house with an extra bedroom, or with a garden, or in a slightly nicer area.

Make sure you speak to a professional first to ensure you’re able to use the rent a room income to increase your borrowing.

Final Thoughts

Personally, we think this is a great scheme which allows us to increase our income to borrow more, and earn some tax-free money.

Another benefit we haven’t even mentioned yet is that by renting out a room you are getting a lodger to pay your mortgage down for you! 

We hope this post made you aware, or made you more informed, of the rent a room relief scheme.

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