With housing costs as high as they are, many homeowners and long-term tenants are taking in lodgers to help with the mortgage or rent. If you're one of them — or thinking about it — the Rent-a-Room scheme is worth understanding in detail. It's a genuinely useful relief that lets you keep a significant amount of rental income completely free of tax.
What is the Rent-a-Room scheme?
The Rent-a-Room scheme is a government allowance that lets you earn up to £7,500 per year from letting furnished accommodation in your own home without paying any tax on it. If there are two joint owners (for example, a couple who own the property together), the allowance is split — £3,750 each.
The £7,500 threshold has been frozen for a number of years now. At current rental rates in many parts of the UK, particularly in cities, it's not actually that hard to exceed it — a room in London, Edinburgh or Manchester can easily fetch £700–£1,000 per month, which would put some landlords over the £7,500 annual limit.
Who qualifies?
The key requirement is that the property must be your main home — the one you actually live in — and the room must be furnished. You can be either the owner or a tenant (subject to your tenancy agreement allowing subletting). You don't have to be present in the property at all times, but it must genuinely be your main residence.
The scheme does not apply to letting an entire property or a self-contained flat within a property — those are treated as normal letting income subject to standard property tax rules. It only applies to a room (or rooms) within a home you share with the tenant.
Short-term lets through platforms like Airbnb can also qualify if the property is your main home, though there are nuances if the property is exclusively let out for periods when you're away — the room must be in your home, not a property you just happen to own.
How the exemption works
If your gross rental income (rent plus any amounts for meals, cleaning or laundry if you provide them) is £7,500 or less, you don't need to do anything. The exemption applies automatically — you don't need to claim it or declare the income on a Self Assessment return, unless you're already required to file one for other reasons.
If your gross rental income exceeds £7,500, you have two options. You can either opt into the Rent-a-Room scheme and pay tax on the excess over £7,500, or you can opt out and instead declare all your rental income and deduct your actual allowable expenses in the normal way. You'd choose whichever results in the lower tax bill.
As a simple example: if you receive £9,000 in rental income and have £500 of actual expenses, the profit on the normal basis is £8,500. Under Rent-a-Room, you'd pay tax on £1,500 (the excess over £7,500). The Rent-a-Room approach is clearly better here. If you had £3,000 of actual expenses, the normal basis gives profit of £6,000 — better than paying tax on £1,500. In that case you'd opt out.
Claiming on your Self Assessment return
If your rental income exceeds £7,500 and you want to use the Rent-a-Room scheme, you need to claim it on your Self Assessment return using the UK Property pages. There's a specific box to tick indicating you're claiming the Rent-a-Room relief and entering only the excess above the £7,500 threshold as taxable income.
If you're already required to file a Self Assessment return for other reasons and your rental income is below £7,500, you should still declare it on the property pages and note that it's covered by the scheme — HMRC likes to see it disclosed even when no tax is due.
What's not covered
There are a few things the Rent-a-Room scheme doesn't help with. It doesn't affect Capital Gains Tax when you sell the property — though the main residence relief (PPR) applies to the whole property since you live there. However, if you've been letting part of the property, it may technically affect your CGT position when you sell, particularly if a letting relief claim is involved. This is an area worth taking advice on if you've had long-term lodgers and you're planning to sell.
It also doesn't affect National Insurance — renting a room is not treated as a trade, so it doesn't generate self-employment NI. And it has no effect on your entitlement to benefits, though large amounts of rental income could affect means-tested benefits — worth checking if that's relevant to your situation.
Is it worth taking in a lodger?
That's a personal question rather than a tax one, but from a pure numbers perspective, a lodger paying £600 per month generates £7,200 in annual rental income — entirely tax-free under the scheme. For a basic-rate taxpayer, that's the equivalent of earning around £9,000 before tax. For a higher-rate taxpayer, closer to £12,000 gross. It's a substantial benefit that doesn't require any special structure or planning — just a spare room and someone to put in it.