If you receive rental income from letting furnished accommodation within your own home (for example, if you have a lodger), you may be able to benefit from the ‘rent-a-room’ scheme.
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Income from renting out room(s) in your home may qualify for ‘rent-a-room relief’, if:
- your income (before expenses) from renting out the room(s) does not exceed £7,500 for the tax year 2023/24 – this limit is £3,750 each if the income is split between two or more people,
- the income arises from the letting of furnished accommodation in a ‘residence’ in the UK, or from associated goods and services, for example providing meals, cleaning or laundry services in connection with the letting,
- that furnished accommodation is in your only or main residence, and
- if it were not for the rent-a-room relief, the income would be taxable, either as trading income, property income or miscellaneous income.
If all of the above conditions are met, the income is exempt from tax and you cannot claim any deductions for related expenses. You do not need to do anything for the exemption to apply – it will apply automatically unless you ‘opt out’.
You may wish to opt out of the rent-a-room scheme if you have made a loss – that is, your expenses are more than your property income. You may prefer to be taxed on the normal basis for property income, so that you can claim and use the loss.
Rent exceeds the rent-a-room limit
If you otherwise meet all of the conditions for rent-a-room relief above, but your gross property income (the amount before expenses are taken off) exceeds the limit of £7,500 (or £3,750 if jointly let), you do not qualify for the automatic exemption.
However, you can make an election to be taxed on an ‘alternative basis’ – meaning you can elect to deduct rent-a-room relief instead of calculating your property income under the usual principles. Therefore, under the ‘alternative basis’, the taxable amount will then be the gross rent received (which includes any payments received for meals and services) less rent-a-room relief. You cannot claim any deductions for related expenses.
This election must be made to HMRC in writing by 31 January, in the second year after the end of the relevant tax year. For example, if you wish to opt in to the ‘alternative basis’ for the tax year ended 5 April 2023, you must make the election by 31 January 2025. In practice, you would usually do this by ticking the relevant box on your self assessment tax return that you want the relief to apply. Filing your tax return by the usual filing deadline will be accepted by HMRC as the relevant notification.
You may not wish to elect to be taxed on the ‘alternative basis’ if you have made a loss – that is, your expenses are more than your property income. You may prefer to be taxed on the normal basis for property income, so that you can claim and use the loss.
Income split between more than one person
As mentioned above, if you and another person are due to receive rent-a-room income from the same property, then the allowance is shared equally between you. The above tests and conditions still apply, but the threshold in each case is £3,750 instead of £7,500. This applies irrespective of the split in actual or beneficial ownership of the property. This means that if your rent-a-room income exceeds £3,750, then you can elect to be taxed on the ‘alternative basis’, and if it does not exceed £3,750, then it is automatically exempt.
A quirk in the rules is that even if more than two of you are due to share the property income, you still each get relief for up to £3,750. Therefore, if three of you own (and live in) a property together and sub-let a room to a lodger, overall you get 3 x £3,750 relief – that is, £11,250.
If the income from renting a room out in your home meets the rent-a-room criteria and falls below the rent-a-room allowance, you will not have taxable property income and will therefore not need to report this on a self assessment tax return.
You may need to complete a tax return if you have income from renting out a room which is taxable, although sometimes HMRC can collect the tax on a small amount of rent through your pay as you earn (PAYE) tax code if you are an employee or a pensioner.
More information on needing to complete a tax return can be found in our page Who needs to complete a tax return.
You should therefore tell HMRC about any taxable income from renting a room. You should contact them as soon as possible, but at the latest by 5 October following the end of the tax year concerned, to notify them about the income. For example, if you start getting taxable income from renting a room in the year to 5 April 2024, tell HMRC by 5 October 2024.
Where the 5 October deadline is missed, you should still tell HMRC as soon as possible. As long as any tax due is paid on time (normally by the tax return deadline of the following 31 January), there will be no ‘potential lost tax revenue’ and no failure to notify penalty to pay for having missed the 5 October deadline.
Letting your whole home
Rent-a-room relief is only available if the furnished accommodation which is let is in a residence which is your only or main residence for some or all of the letting period (that is, the part of the tax year during which the property is let).
If your property is not your only or main residence at any point during this period, rent-a-room relief will not be available.
If you let out your whole home, then depending on the circumstances it may no longer qualify as your only or main residence for the letting period. HMRC provide some examples in their property income manual. We recommend that you seek advice if you are in this situation.
Selling your home
We look at the capital gains tax implications of letting your home to a lodger on our page Selling your home.
HMRC’s technical guidance on rent-a-room relief can be found in their property income manual.