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This publication is available at https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet/dgh
The Rent a Room Scheme allows owner occupiers and tenants to receive tax-free rental income if you provide furnished accommodation in your only or main home.
For the tax year 2015 to 2016, the annual Rent a Room limit is £4,250. This reduces to £2,125 if someone else receives income from letting accommodation in the same property, such as a joint owner. The limit is the same even if you let accommodation for less than 12 months.
From 2016 to 2017 tax year, the annual Rent a Room limit has increased. For more details see Rent a room in your home.
When you can use the scheme
You can use the Rent a Room 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
When you can’t use the scheme
You can’t use the Rent a Room Scheme if the accommodation is:
- not part of your main home when you let it
- not furnished
- used as an office or for any business - you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities
- in your UK home and is let while you live abroad
Rent a Room Scheme
If your gross receipts from letting are not more than the Rent a Room limit of £4,250 (or £2,125), you don’t pay tax on your profit. If they are more than the limit, you may still be able to benefit under the Rent a Room Scheme.
Your gross receipts include:
- rental income (before expenses)
- any amounts you receive for meals, goods and services, such as cleaning or laundry
- any ‘balancing charges’
You usually count your gross receipts for a tax year - that is, from 6 April one year to 5 April the next.
If your letting activity amounts to a trade, you count your gross receipts for your basis period. How to calculate your taxable profits: HS222 Self Assessment helpsheet provides more information.
If your gross receipts are less than the Rent a Room limit
If your gross receipts are less than £4,250 (or £2,125), you are automatically exempt from tax on that income.
If you have made a loss, however, it may be better for you to pay tax in the normal way - that is, on your receipts less expenses. You will need to tell HM Revenue and Customs (HMRC) that you want to do this within the time limit.
If your gross receipts are more than the Rent a Room limit
If your gross receipts are more than £4,250 (or £2,125), you can choose how you want to work out your tax:
You pay tax on your actual profit - your total receipts less any expenses and capital allowances.
You pay tax on your gross receipts over the Rent a Room limit - that is, your gross receipts minus £4,250 (or £2,125). You cannot deduct any expenses or capital allowances if you choose this method.
HMRC will automatically use your actual profit (Method A) to work out your tax.
If you want to pay tax using Method B, you need to tell HMRC within the time limit. You will continue to pay tax on your gross receipts over the Rent a Room limit until you tell HMRC that you want to change back to paying tax on your actual profit (Method A).
If you pay tax using Method B, this automatically stops if your rental income drops below the £4,250 (or £2,125) limit.
Changing the way you pay tax on your rental income
You can change between each method from year to year. You need to decide which method is best for you and tell HMRC within the time limit each time you want to make a change.
Chris rents out a room in his own home. The rent is £150 a week plus contributions to heating and light. His gross receipts for 6 April 2015 to 5 April 2016 are £8,000 (£7,800 rent plus £200 for the heating and light).
Chris has expenses of £4,500:
- if Chris uses his actual profit (Method A), he pays tax on £3,500 (£8,000 minus £4,500)
- If Chris uses his gross receipts over the Rent a Room limit (Method B), he pays tax on £3,750 (£8,000 minus £4,250)
It is better for Chris to pay tax on his actual profit, using Method A. If Chris had previously asked to pay tax using Method B, he will need to tell HMRC that he wants to change back to paying tax on his actual profit (Method A).
If you move home during the year
If you rent out a room in both your old and new home, you need to add together the total rent from the old and new home that you received for the year. If your total gross receipts are below £4,250 (or £2,125), you don’t pay tax on your lettings.
You must let HMRC know by 31 January following the end of the tax year if:
- you don’t want to use the Rent a Room Scheme when your receipts are below £4,250 (or £2,125), for example, if you want to claim losses
- you want to start or stop paying tax on your gross receipts over the Rent a Room limit (Method B)
Greg runs a small bed and breakfast business. A few years ago, he told HMRC that he wanted to pay tax on his gross receipts over the Rent a Room limit (Method B). For the tax year ending 5 April 2016, Greg has worked out that if he paid tax on his actual profit (using Method A) then he’d pay less tax. He must let HMRC know that he wants to use Method A by 31 January 2017.
Extending the time limit
You can only extend the time limit in certain circumstances. For example, if you were seriously ill and it was impossible for you to deal with your tax affairs.
Creating a loss
If you use the Rent a Room Scheme because your gross receipts are exempt from tax (under £4,250, or £2,150) or you pay tax using Method B, you cannot create a loss.
If you want to create a loss, you must tell HMRC that you want to pay tax on your income less expenses (Method A).
If you have made a loss, you can use them against your rental profits in future years to reduce the tax you have to pay. You can also use them against your gross receipts over £4,250 (or £2,125) if you pay tax using Method B.
If your letting activity amounts to a trade, you can use your losses in other ways. Losses: HS227 Self Assessment helpsheet provides more information.
For more information about online forms, phone numbers and addresses contact Self Assessment: general enquiries.