How does the Rent a Room scheme work?

The scheme is generous and widely misunderstood in three ways: it applies to gross receipts rather than profit, it covers tenants who sublet with permission as well as owners, and it does not cover a self-contained flat or a property let while you live elsewhere. Getting those three right decides whether it applies to you at all.

Step by step

1. Check the accommodation qualifies.It must be furnished accommodation in your only or main home. A self-contained flat generally does not qualify, nor does letting a property you do not live in, nor letting space used as an office or for business.
2. Check you qualify.Owner-occupiers and tenants can both use it, though a tenant needs their landlord's permission to sublet and should check the agreement first. You must live in the property for at least part of the letting period.
3. Work out your gross receipts.Everything the lodger pays you: rent, and also any charge for meals, cleaning, laundry or bills. It is the total received, not the profit, that is measured against the allowance.
4. Find the current allowance.GOV.UK publishes it on the Rent a Room pages. It is halved where someone else — a partner, a joint owner, anyone — also receives income from letting the same property.
5. If you are under the allowance, do nothing special.The exemption applies automatically. If you already complete a self assessment return you note it there; if you do not, and this is your only untaxed income, you generally do not need to start one.
6. If you are over the allowance, choose a method.Either pay tax on the receipts above the allowance with no expenses deducted, or opt out of the scheme and work out the profit in the ordinary way by deducting allowable expenses. You choose whichever gives the lower figure and can change your mind each year within time limits.
7. Tell HMRC if you need to.Register for self assessment if you have tax to pay and are not already in the system, by the deadline after the end of the tax year in which the income arose. The deadlines are on GOV.UK and missing them attracts penalties.
8. Check the things the tax scheme does not cover.Your mortgage lender's or landlord's consent, your home insurer, your council tax single person discount, leasehold restrictions on sharing, and whether the arrangement creates a licensable house in multiple occupation. The tax exemption says nothing about any of them.
9. Keep simple records.What was received and when, and what you spent if you might opt out of the scheme. A spreadsheet and a folder of receipts is enough, and it has to be kept for the statutory period.

Tips

• Work out both methods on a spreadsheet each year. The better option changes as your expenses change.
• Tell your insurer, your lender or landlord, and check the lease, before the lodger moves in. All three are cheaper to ask than to fix.
• Keep the lodger agreement and the payment record together. It is what you would show HMRC and what settles a deposit dispute.

Common mistakes

• Measuring profit against the allowance — It is gross receipts, including anything charged for bills, meals or cleaning. People go over without realising because they netted off costs first.
• Not telling the insurer — Home insurance frequently excludes or restricts cover where there is a paying occupant. A claim refused for non-disclosure costs far more than the premium change would have.

If it doesn't work

Questions people ask