I’ve been thinking of taking in a lodger to help with my mortgage. Will I have to pay any tax on rental income received?
Rental income is taxable, however renting out a room to a lodger may qualify for ‘Rent a Room’ relief. The Rent a Room scheme is open to owner occupiers or tenants who let out furnished accommodation to a lodger in their main home and allows you to earn up to £7,500 a year tax-free, or £3,750 if you are letting jointly. The claim is automatic.
You don’t have to be a homeowner to take advantage of the scheme. You can also lease out a room to a lodger if you are a tenant, as long as your own lease allows you to do so.
You might wish to charge for additional services when you take in a lodger, such as providing meals or laundry services. The money you receive for these services must be added to the rent you receive to work out your total income.
If the income exceeds £7,500 then you do not qualify for the automatic exemption and must complete a tax return. There are two methods on how to calculate the tax payable. On your tax return you can choose to opt into the scheme and claim the tax-free allowance, only paying tax on the gross receipts over the Rent a Room limit. If this method is chosen then related expenses and capital allowances cannot be deducted. The second method opts out of the scheme by simply recording your income and expenses on the property pages of the tax return. Using this method means that you pay tax on actual profit i.e. total receipts less any expenses and capital allowances.
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