Lodgers & Income Tax / Rent a Room Scheme
The important thing to remember about any type of residential lettings, which includes home-owners with a single lodger let, is that it’s treated like any other profit based business. That means the landlord is eligible for being taxed on any net profit.
The formula to calculate the net profit is the same as any other business: minus [rental] income from all allowed expenses.
The amount of tax you pay will depend on your current tax rate, and if your extra rental income pushes you into different tax bracket from your current one. You should declare your rental income on the property pages of your tax return.
If you are unsure on the matter and require more advise, it is best to talk to a qualified accountant.
Allowable Expenses
As said, you’re entitled to offset any expenses, which can include the following:
- Landlord Insurance
- Letting agent/marketing fees
- Accountants fees
- Maintenance and repairs
- Direct costs of letting the property, such as stationary (e.g. rentbook)
It is best to always keep a record of your rental income and expense receipts and file them away, so you have a neat set of accounts.
“Rent a room” Scheme tax break incentive
As part of an incentive to encourage more homeowners to take in lodgers, the Government introduced the “Rent a room” Scheme, which lets you lets you earn tax-free rental income of up to £7,500 a year (note: this new rate is as of April 2016, the allowance was £4,250 prior).
If you opt into the scheme, you need to let HM Revenue & Customs know this on your tax return and claim your tax-free allowance. If your rental income is below the rent a room scheme allowance of £7,500, and you don’t complete a tax return for other reasons, you do not need to take any action because the tax exemption is automatic.
You can qualify for the scheme if:
- you let a furnished room to a lodger
- your letting activity amounts to a trade, for example, if you run a guest house or bed and breakfast business, or provide services, such as meals and cleaning
You don’t qualify for the scheme if accommodation is:
- not part of your main home when you let it
- Unfurnished
- used as an office or for any business
- in your UK home and is let while you live abroad
- the whole of your home, rather than a part of it
There are disadvantages to the scheme, which is why it is optional and why not everyone opts into it. The biggest disadvantage is that you won’t be able to claim any expenses related to the letting, for example repairs, letting costs. Also, you won’t be able to take advantages of other allowances, such as the the Landlord’s Energy Saving Allowance (which is where landlords can claim back the costs of buying and installing energy-saving items).
For more information on the Rent a room scheme, please go to the GOV website.