Kai Rivers
In the UK, homeowners can earn up to £7,500 per year tax-free from letting out furnished accommodation in their homes under the Rent a Room Scheme. This threshold is halved to £3,750 if the income is shared with someone else. If you earn less than your threshold, you don't need to declare it or do anything. However, if you earn more than the threshold, you must complete a tax return and opt into the scheme to claim your tax-free allowance.
| Characteristics | Values |
|---|---|
| Maximum number of lodgers | 2 |
| Tax-free allowance | £7,500 per year |
| Tax-free allowance if sharing income with someone else | £3,750 per year |
| Tax-free allowance if receiving meals as part of rent | £3,750 per year |
| Maximum deposit amount a landlord can ask for | 5 weeks' worth of rent |
| Maximum benefit payment | Local Housing Allowance rate |
| Rent-a-room allowance | £4,250 per year |
| Lodger tenancy type | Excluded occupier or occupier with basic protection |
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What You'll Learn
Rent-a-room scheme: earn up to £7,500 tax-free per year
The Rent a Room Scheme is a government incentive that allows landlords and live-in landlords to earn up to £7,500 of tax-free income every year by letting out furnished accommodation in their home. The threshold is halved to £3,750 if the income is shared with someone else. The tax exemption is automatic if you earn less than the threshold, meaning you do not need to do anything. However, if you earn more than £7,500, you must complete a tax return and opt into the scheme to claim your tax-free allowance.
The Rent a Room Scheme is open to owner-occupiers or tenants who let out furnished accommodation to a lodger in their main home. It is important to note that you cannot use the scheme for homes converted into separate flats, and you must check with your mortgage lender and home insurer to ensure that renting out a room is allowed under their terms.
If you are on Universal Credit, any money you receive from lodgers under the Rent a Room Scheme will not be counted as income up to the tax-free allowance of £7,500. However, the income from renting out your room might affect any other means-tested benefits you receive. For example, if you live alone and receive a 25% single person's Council Tax reduction, you will no longer qualify for this discount if you take in a lodger.
Additionally, it is important to keep records of your income and expenses, even though you cannot claim expenses under the Rent a Room Scheme. These records may be necessary if you opt out of the scheme later on.
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Rent changes: report to the council and claim more benefits
If you are a lodger and your rent changes, you may be able to claim more money. You must report any changes in your rent payments to your local council. If you have an online account, you can report a change in your rent payment by signing in to your Universal Credit account. Alternatively, you can call the Universal Credit helpline.
The maximum benefit payment you can usually get is called the 'Local Housing Allowance Rate'. If your rent is more than the local housing allowance rate, you will have to pay the rest yourself. For example, if your housing element is £400 and your new rent is £450, your housing element will increase to £425, and you will have to cover the remaining £25 yourself.
If you cannot make a new claim for Housing Benefit, you might be able to apply for the housing element of Universal Credit instead. If you are unsure whether you can claim Housing Benefit or continue to claim it, you should talk to an advisor.
If you are a landlord, taking in a lodger could affect your Housing Benefit. The rent from a lodger is not treated as income for people on Universal Credit. However, any income you get from a lodger could affect your entitlement to other benefits and tax credits.
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Lodger rights: privacy, eviction, and rent reviews
Lodgers have fewer rights than most tenants, and these rights can vary depending on the state or country in which they live. For example, in the US, the law varies from state to state and can be challenging to navigate for lodgers. In the UK, lodgers have distinct rights and protections compared to tenants.
Privacy
As a lodger, you typically live with your landlord, which means they can easily access your living space. While your landlord does not need permission to enter your bedroom, you still have a right to privacy. However, if you take measures to restrict their access, such as installing a lock they don't have a key for, you may be considered a tenant with "exclusive occupancy" rights, changing your legal status.
Eviction
Lodgers are generally more vulnerable to eviction than tenants and can be evicted with shorter notice periods. In England, for instance, landlords can ''peaceably evict'' lodgers without using threats or violence when the notice or fixed term ends. This could involve changing the locks while the lodger is out. Landlords are not required to go to court to evict lodgers, but it is a criminal offense to use or threaten violence during the eviction process.
Rent reviews
Rent reviews for lodgers can be flexible and informal, depending on the agreement with the landlord. In some cases, rent prices may be negotiated or adjusted based on market trends or other factors. However, it's important to note that lodgers may have less say in their living space than tenants, including aspects like rent amounts or increases.
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Benefits: how rent income affects your benefits
If you are receiving benefits and your housing situation changes, you might be able to claim more money. For example, if your rent changes or you move to a new place with a new rent amount. The maximum benefit payment you can usually get is called the 'Local Housing Allowance rate' (LHA). It depends on factors such as the area you live in. If your rent is more than the LHA rate, you will have to pay the remaining amount yourself.
If you are renting out a room in your home, you may have to pay tax on any profit you make from renting. You can earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This threshold is halved to £3,750 if you share the income with someone else. You can let out as much of your home as you want. The tax exemption is automatic if you earn less than your threshold. If you earn more than the threshold, you must complete a tax return. You can then opt into the Rent a Room Scheme and claim your tax-free allowance.
You must pay tax on any profit you make from renting out property. Your profit is the amount left once you've added together your rental income and taken away the expenses or allowances you can claim. Allowable expenses are things you need to spend money on in the day-to-day running of the property, such as maintenance and repairs. You can also deduct expenses from your rental income when working out your taxable rental profit as long as they are wholly and exclusively for the purposes of renting.
If you are not sure if you need to send a tax return, you need to register by 5 October following the tax year you had rental income. You can declare unpaid tax by telling HMRC about rental income from previous years. If you have to pay a penalty, it will be lower than if HMRC finds out about the income themselves. You will be given a disclosure reference number and three months to work out what you owe and pay it.
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Mortgages and insurance: notify your lender and insurance company
Whether or not you need to declare your lodger's rent to your mortgage lender depends on the terms and conditions of your mortgage. Some lenders require formal permission before you bring in a lodger, while others may have restrictions on rental income or limit the number of lodgers allowed. It is always best to check with your lender to avoid breaching your contract.
If you are planning on getting a new mortgage, it is a good idea to specify that you intend to take in a lodger. Some lenders will consider the income you receive from a lodger when assessing your mortgage application and affordability. However, many lenders are wary of lodger income as it can be short-term and unreliable. In addition to the standard mortgage documents, you will also need to supply evidence of your lodger's income.
You should also inform your insurance company about your lodger as it could affect your coverage terms. Many policies do not include lodgers by default, and the more people you have in your home, the higher the probability of accidental damage to the building and contents. Some insurance companies may increase your premium, while others may not cover the lodger's contents or any damage caused by them.
It is important to note that lodgers have different rights than tenants and are considered excluded occupiers. They do not have exclusive possession of any part of the property and can be evicted without proper legal notice. As a landlord to a lodger, you must provide a safe and habitable living environment and respect their privacy and rights.
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Frequently asked questions
If you earn less than £7,500 per year from your lodger, you do not need to declare it. This threshold is halved to £3,750 if you share the income with someone else.
If you earn more than the threshold, you must complete a tax return and can then opt into the Rent a Room Scheme to claim your tax-free allowance.
If you don't want to opt into the scheme, you can record your income and expenses on the property pages of your tax return.
Yes, if you have a mortgage, you should double-check that your mortgage policy allows lodging. Your lender will likely ask you to send them a copy of the Lodger Agreement.
