The Rent a Room Scheme
This is a government initiative which allows live in landlords (resident landlords) within the UK to earn up to the rent a room scheme allowance threshold for rooms let in their main home each financial year, before paying tax on their rental income.
The allowance is currently £4,250 per tax year, but will increase to £7,500 on 6 April 2016.
The allowance includes any extras you charge - e.g. toward utility bills or any services that you provide.
If the "landlord" is more than one person, the allowance is divided between you - e.g. if there are two landlords, you would each be allowed £2,125 (£3,750 after 6 April 2016) before paying tax; however, this means you would each need to declare any room rental income over your proportion of the allowance.
There are occasions where more than one person owns a property (in which accommodation is let to a lodger), but not all the owners live there. In this situation, it would only be the resident owners who will be landlord to the lodger; you cannot be a lodger landlord and live outside the property. Therefore, only the resident landlord will qualify for rent a room.
If the rental income you make from renting your room exceeds the rent a room allowance (or your proportion if you're a joint live in landlord), but your total yearly income still doesn't exceed the current income tax personal allowance, while you would still fill in a tax return, you wouldn't pay tax for that financial year.
If you aren't currently a UK tax payer, but you incur a loss from renting a room (whether your rental income is over the rent a room scheme allowance or not) you can declare this loss in a later tax year if your circumstances change and you become a tax payer.
NB if your rental income is below the rent a room scheme allowance, and you don't complete a tax return for other reasons, you do not need to take any action - there is no "joining" (this confusion arises as you can choose to opt out of rent a room, usually because you've incurred a loss greater than the rent a room allowance).
Can't I just get it included in PAYE?
- If you work for an employer and you pay tax through PAYE, you can apply to HMRC to have any additional income up to £3000 deducted through PAYE. In the case of income from renting a room, this would be tax payable after the rent a room tax allowance is taken into account (assuming you don't decide to opt out).
For further guidance on how to complete your tax return if you rent a room, please see Rent a Room for Traders - note, this help sheet does still apply to non traders (i.e. someone just renting a room in their home) - you would complete the UK Property Pages of the tax return not the Self Employment pages (which apply to people running boarding houses or HMOs etc in this instance).
Use this quick ready reckoner to assess your eligibility.