Rent out a Room in your Home to Earn Money

Renting Out a Room in Your Home

With the rising cost of living in the UK, you may be feeling the strain caused by increasing expenses and higher mortgage costs. The good news is that there might be a solution to earn extra money within your home.

Renting out a room in your home can offer a source of income and help alleviate some of the mounting financial pressures.

Many people may hesitate to take this step due to concerns about legal complexities, tax implications or difficult tenants.

However, it is possible to earn income by renting a room in your home while avoiding these worries. Continue reading our guide below to learn how.

table of contents

• Rent a room scheme
• Impact on benefits
• Tax Options
• Action list before you take in a lodger
• How to find a lodger
• Screening lodgers
• FAQs for renting a room in your home to make money
• Final Thoughts

The Rent a Room scheme was introduced by the UK government in 1992. It is available to homeowners and tenants who rent out rooms to lodgers in their primary residence.

Under this scheme, you can earn up to £7,500 tax-free if you're letting on your own or £3,750 if you're sharing with someone. 

And it's not just homeowners who can benefit. Renters can also take advantage of subletting a room in their home if their lease agreement allows it.

TAX IMPLICATIONS

If the money you make from renting a room stays below the £7,500 limit set by the Rent a Room scheme, you don't need to do anything. The tax exemption automatically applies in this case.

However, if your earnings exceed this threshold, you must tell HMRC and submit a tax return.

Once you've done that, you have two choices;

1. You can choose to participate in the scheme; mention this on your tax return and claim the tax allowance that comes with it.

2. You can decide not to participate; In this case, report your earnings and any relevant expenses related to the property in the property section of your tax return.

If you don't usually receive a tax return form, you can request one from HM Revenue & Customs at www.hmrc.gov.uk/ 

There isn't a form to inform HM Revenue & Customs that you don't want to participate in the Rent a Room scheme. If your earnings exceed the threshold or you already fill out a tax return, include all information about rent received and expenses in your tax return.

Renting out a room can be a great way to boost your income and provides someone with a place to live. Please remember that receiving rental money may affect any benefits you currently receive.

Universal Credits;

If you are on Universal Credit, your Rent a Room scheme earnings do not count as income until you exceed the tax threshold of £7,500. This can be a great way to increase your earnings.

Council Tax;

If you currently receive a 25% single-person Council Tax Reduction renting out a room will result in losing this reduction.

Housing BENEFITS and Rent a Room

How the Rent a Room scheme affects your Housing Benefit for tenants living in housing depends on how your lodger fits into the equation:

Boarders; If you provide a room and meals to your lodger, they are considered boarders. The initial £20 of rent received each week is disregarded, and only half of what remains counts as your income. Let's take an example. Where the weekly rent is £50, after deducting £20 from it, half of the remaining £30 (£15) will be considered as part of your income, which could impact your Housing Benefit.

Subtenants; If you only offer a room without providing meals to your lodger, they would be classified as subtenants. Similarly, the first £20 of income is not taken into account.

Unlike for boarders, the remaining amount is considered part of your income. If you receive a rent of £50 and set aside £20, the remaining £30 could affect your Housing Benefit.

Understanding the Bedroom Tax

The "bedroom tax ", officially called the Under Occupancy Penalty, refers to a reduction in housing benefits for social housing tenants in the UK deemed to have more bedrooms than necessary. Some of your housing benefits may be reduced if this is the case. However, one way to mitigate the impact of this tax is by taking in a lodger. Renting out a bedroom provides additional income and could exempt you from the bedroom tax depending on your specific circumstances and benefit terms.

Impact on Means-Tested Benefits

If you receive means-tested benefits such as Income Support or Pension Credit, rental income can affect these benefits. It's best to contact your provider and ask about any impact. If you decide to take in a lodger, there are services, like meals or laundry, that you can charge for. Adding the money you receive from these services to your rent income is essential to calculate your earnings.

If your total income for the tax year is more than £7,500 (from April to 5th April) and if it surpasses the individual Personal Allowance, you will have to pay some taxes.

TAX DUE

If your total income for the tax year is more than £7,500 (from April to 5th April) and if it surpasses the individual Personal Allowance, you may have to pay some taxes.

Regarding tax obligations, there are two options if your rent a room income exceeds £7,500 in a tax year;

Option 1. You can pay taxes based on your profits from renting out the property. This is calculated by subtracting any expenses from your income. This approach is commonly used for businesses.

Option 2. Alternatively, you can pay taxes based on your income ( tax earnings) minus the tax-free threshold without deducting any expenses.

Remember that you're not limited to one method every year. You can change your approach annually. Please make sure to let HMRC know about any changes.

Is the Rent a Room Scheme best for You? Let's Evaluate.

The main advantage of the Rent a Room scheme is that you can earn up to £7,500 tax-free each year.

However, there is one downside. You won't be able to claim expenses related to the rental. So if there are any maintenance or repair costs or you need to replace the boiler, you can't deduct these expenses from your income within the scheme.

It's important to crunch the numbers and see if this scheme will truly benefit you.

LET'S Consider a Scenario.

Meet Bob. He rents a room for £200 per week, which adds to an income of £10,400. Surpassing the Rent a Room allowance.

If he uses the scheme, any income above £7,500 will be subject to tax at his marginal rate. As a basic rate taxpayer, he would owe 20% tax on the amount of £2,900. Resulting in a tax bill of £580.

On the other hand, if Bob decides not to use the Rent a Room scheme and declares it as rental income, he can deduct his expenses and pay taxes only on the net profit. Bob's total yearly expenses amount to £2,000. By subtracting these expenses from his rent, he ends up with a profit of £8,400. However, his tax payment increases to £1,680 (which is 20% of the £8,400).

The Rent a Room scheme works in Bob's favour in this situation. However, if his expenses were higher at around £4,500, he would benefit financially by opting out of the scheme.

Keeping Records

Even if the Rent a Room scheme doesn't allow for expense claims, maintaining records of your income and costs is crucial, this becomes especially important if you decide to opt out of the scheme in the future in case of an enquiry by HMRC.

Before welcoming a lodger into your home, there are some checks that you need to perform;

1. Mortgage Conditions; If your home is mortgaged, consult your lender and confirm whether room rentals are permitted.

2. Insurance Clauses; Contact your home insurance provider to ensure that lodgers will be covered.

3. Rental Agreements; For those renting their homes, check your lease agreement to see if it allows subletting to a lodger.

KEY POINT

Get in touch with your lender, insurer or landlord to ensure you can use the Rent a Room scheme successfully.

How do you FIND someone trustworthy to rent a room in your home?

Here are a few steps you can take;

1. Online Platforms; Popular websites like Spareroom.co.uk, Gumtree and EasyRoommate are platforms where you can advertise your room and connect with lodgers. These sites often provide tools to help screen applicants ensuring you find the best fit.

2. Local Advertisements; Consider placing ads in newspapers, community centres or university notice boards—especially if you live near a college or university. This way, you can target individuals interested in renting in your area.

3. Social Media: Use Facebook groups or other platforms like Nextdoor to post about the room. This can also give you insight into lodgers through their profiles or mutual connections.

4. Word of Mouth; Don't underestimate the power of referrals! Let your friends and family know you're looking for a lodger—they might have someone in mind who needs a place to live.

THE FOLLOWING STEPS SHOULD HELP YOU FIND A SUITABLE LODGER FOR YOUR SPACE IN NO TIME. 

Step 1; Attend Lodger Matching Events; Many towns and cities organise events where homeowners and potential lodgers can meet, similar to speed dating but for finding living arrangements.

Step 2; Evaluate Potential Lodgers; assessing lodgers is essential Regardless of your chosen method. This involves checking their references, verifying their employment status and even conducting background checks if necessary.

Step 3; Verification; In the UK, landlords must ensure that potential tenants or lodgers have the right to rent their property. This entails confirming their legal status to be in the UK.

Step 4; Create a Lodger Agreement; Once you've identified a lodger, create an agreement that outlines the terms of their stay. This should include the rent amount, deposit, notice period and house rules. By doing this, both parties will understand their rights and responsibilities. You can go ahead and seek help from a solicitor. You can use a ready-made template for drafting this agreement. These are readily available online. 

By following these steps, you can increase your chances of finding a suitable lodger for your home. 

Understanding the Rent a Room scheme is your first step to unlocking additional income from your spare room.

You've learned that tax benefits can make this side hustle even more lucrative, with rental income up to £7,500 per year being exempt from taxation.

While renting a room in your home isn't a side hustle that will suit everyone, it's an option to consider if you're keen on generating extra income.