I have recently become unemployed due to the coronavirus pandemic so I am going to rent a room out in my home to get some extra income. What are the tax implications if this is my only source of income?
HMRC’s rent-a-room scheme is an optional exemption scheme, which allows individuals to receive up to £7,500 of tax-free gross income (income before expenses) from renting out spare rooms in their only or main home. The exemption is halved where the income is shared with a partner or someone else. Broadly, as long as income is below the annual threshold, it does not need to be reported to HMRC. If income exceeds the threshold, it needs to be reported to HMRC via the self-assessment system.
To work out whether it is preferable to join the scheme, the following methods of calculation should be compared:
- Method A: paying tax on the profit from letting worked out in the normal way for a rental business (ie rents received less expenses).
- Method B: paying tax on the gross amount of receipts (including receipts for any related services they provide) less the £7,500 exemption limit.
If you make an election (within the time limit) for Method B to apply, the first £7,500 will be tax-free, and the remainder will be covered by your income tax personal allowance, so will be tax-free. The remainder is calculated as your gross rental receipts over and above the £7,500 figure, without any deduction for expenses.
HMRC’s Helpsheet HS223 contains further information.