What does Rent-a-Room Scheme mean?

It is a tax-free solution of a plus income for those of you who are thinking of renting a room in your main place of residence (your house). The maximum you are allowed to earn from this scheme is £4,250/annum, and anything above this sum becomes subject to taxation. Certain conditions have to be met so that you become eligible for tax-free income, and these are:  you have to live in the same building with your tenant, and the place which you let is your main place of residence.

Tax pay becomes obligatory on amounts greater than the above specified per annum allowed income, and you can basically choose between two options: you may choose to pay tax on the excess of the money, or you may choose to pay the tax on the actual profit (minus expenses), and you have to establish for yourself whichever is most convenient in your case.

To exemplify it, say you rent a room for £130/week, which makes out an annual income of £6,760 (130x52), which exceeds the allowed sum, so this income is not tax free. Now, let’s say your expenses are of £1,100, so your profit becomes £5,660.

Basically, the excess is £2,510 (annual income minus the threshold allowed sum of £4,250). Moreover, you may choose to pay tax on the actual profit, which is £5,660, or on the excess amount which is more convenient in this case. It is always very important to make all your calculations and see which is the smaller amount, the excess or the actual profit? And choose to pay your taxed in concordance with that.

The Inland Revenue’s leaflet IR87 Letting & Your Home and on the Tax Help sheet IR223, will definitely enlighten you up on matters concerning the Rent-a –room scheme and its benefits and possible drawbacks.