What Is the 'Rent a Room' Scheme & How Will It Affect Your Tax Return?
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Tax advice
5
January 2022

What Is the 'Rent a Room' Scheme & How Will It Affect Your Tax Return?

What is the UK's 'Rent a Room' Scheme, who can make the most of it, and do you have to declare the rental income on your tax return? We've summarised the key points in this article.

The Coconut Team
The Coconut Team
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What is the 'Rent a Room' Scheme?

If you rent out a furnished room in your only or main home, then you can earn up to £7,500 a year (which works out as £625 per month) tax free.

If you share the income with a joint owner of the property, then you each get half the allowance: £3,750 per year.

Do I have to declare this income on my tax return?

If you earn less than £7,500

To make things simple, there is an 'automatic tax exemption'—which means that if you earn under the £7,500 (or £3,750) threshold, you don't need to include this income on your tax return.

If you earn more than £7,500

However, if you earn over the threshold, then you will need to declare this income on your tax return. If, for example, you earn £10,000 (over the course of a year) from renting out a room in your house, then you can either:

  • Declare the £10,000 income, minus any expenses or 'capital allowances' that you've had in maintaining the room; or
  • Declare the £10,000 income, minus the £7,500 allowance

Depending on how big your expenses were for the year, it will usually be best to claim the £7,500 allowance.

You usually work all of this out based on the tax year, which runs from 6th to 5th April.

How do I record this income using Coconut?

As a sole trader

If you have a business account (for your self-employed work) connected to Coconut, you can put your rental income through that—but make sure you categorise these transactions as 'Personal', so that they don't count towards your taxable self-employment income.

You might also want to add notes to these transactions, so that you can identify them later.

Alternatively, you can pay this income straight into your personal account, rather than your business account

We'd recommend doing this so that you keep your business account relating only to your business transactions.

As a limited company

If you run a limited company, then making non-business payments into your business account will make things messy and complicated—getting your rental payment paid into your personal account will keep things much simpler.

Where can I learn more?

There's plenty more on the 'Rent a Room' Scheme o the Government website.

Note that if you don't qualify for the Rent a Room Scheme—for example, because you're actually renting a second property, or because you're renting your UK property while you're abroad—then check out Government's guidance for Landlords.

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