Renting out a furnished room in your home is one of the easiest ways to earn extra income in the UK. The Rent a Room Scheme lets you earn up to £7,500 per year completely tax-free — no Self Assessment, no complicated expenses, just straightforward extra cash.
Whether you want to offset your mortgage, earn passive income, or simply fill a spare room, here’s everything you need to know about how the scheme works and what to watch out for.
What Is the Rent a Room Scheme?
The Rent a Room Scheme is an HMRC tax relief that lets you earn up to £7,500 per year tax-free from letting furnished accommodation in your main home. If your rental income stays below this threshold, you don’t need to pay any Income Tax on it and you don’t need to declare it on a tax return.
The scheme is designed to encourage homeowners and tenants to take in lodgers, helping to increase the supply of affordable accommodation while earning extra income.
How the Rent a Room Scheme Works
The £7,500 Threshold
| Your Rental Income | Tax Treatment |
|---|---|
| Up to £7,500 per year | Tax-free, no need to declare |
| Over £7,500 per year | You must choose between Option A or Option B |
| Income below £7,500 | Tax-free under the scheme (even if you claim expenses) |
Key point: The threshold is £7,500 whether you let one room or several. It’s a single annual allowance for the property, not per room.
What Counts as Rental Income
The £7,500 covers rent and any services you provide with the room, such as:
- Use of furniture
- Bills included in the rent (electricity, gas, water, broadband)
- Breakfast or other meals
- Cleaning or laundry services
If you provide services beyond basic accommodation, the total value counts towards the £7,500 threshold.
What Doesn’t Count
The scheme doesn’t cover:
- Letting out your entire property (this is a rental business, not a room letting)
- Letting a room to a lodger who doesn’t live in the property
- Commercial lets or holiday lets (these are taxed separately)
Rules for Using the Scheme
To qualify for the Rent a Room Scheme, all of the following must apply:
1. It Must Be Your Main Home
You must live in the property yourself. You can’t use the scheme for:
- Letting a room in a property you’ve moved out of
- Letting rooms in a second home or investment property
- Subletting a room you’re renting (unless you have your landlord’s permission and it’s your main home)
2. The Room Must Be Furnished
The room must contain basic furniture:
- A bed
- A wardrobe or chest of drawers
- A bedside table
- Curtains or blinds
You don’t need to provide a full furniture pack, but the room must be habitable as furnished accommodation.
3. The Lodger Must Be a Private Individual
You can let to a:
- Lodger (informal arrangement, no exclusive possession)
- Tenant (formal assured shorthold tenancy agreement)
- Student or professional sharing your home
The lodger must be a private individual, not a company or organisation.
4. You Must Be the Owner or Tenant
If you own your home, you can let rooms under the scheme. If you rent, you can also let rooms — but you must check your tenancy agreement and get your landlord’s permission if required.
Option A vs Option B: If You Earn Over £7,500
If your rental income exceeds £7,500, you have two options:
Option A: Keep the £7,500, Pay Tax on the Rest
| Your Income | Tax-Free Allowance | Taxable Amount | Tax (20% Basic Rate) |
|---|---|---|---|
| £8,000 | £7,500 | £500 | £100 |
| £10,000 | £7,500 | £2,500 | £500 |
| £12,000 | £7,500 | £4,500 | £900 |
You keep £7,500 tax-free and pay Income Tax only on the excess. This is the simplest option — no need to track expenses.
Option B: Deduct Actual Expenses, Pay Tax on the Profit
You can ignore the £7,500 allowance and instead deduct your actual expenses from your rental income. You then pay tax on the profit.
Allowable expenses include:
| Expense | What You Can Claim |
|---|---|
| Mortgage interest | 20% tax credit on interest paid (not full deduction) |
| Council tax | Proportion attributable to the rented room |
| Water and sewerage | Proportion attributable to the rented room |
| Insurance | Buildings and contents insurance for the room |
| Repairs | Repairs to the rented room (not improvements) |
| Bills | Electricity, gas, broadband (proportion for the room) |
| Cleaning | Professional cleaning of shared areas |
| Furniture depreciation | Replacement of furnished items |
| Letting agent fees | If you use an agent to find lodgers |
Example:
| Item | Amount |
|---|---|
| Annual rent | £10,000 |
| Less: Allowable expenses | -£4,000 |
| Taxable profit | £6,000 |
| Income Tax (20%) | £1,200 |
In this case, Option B is better than Option A because the expenses reduce the taxable amount below £7,500.
Which Option Should You Choose?
| If… | Choose |
|---|---|
| Your income is under £7,500 | Neither — it’s all tax-free |
| Your income is over £7,500 and expenses are low | Option A — keep £7,500, pay tax on the rest |
| Your income is over £7,500 and expenses are high | Option B — deduct expenses, pay tax on the profit |
| You’re not sure | Calculate both and compare |
Worked Example: Renting a Room for £600/Month
Emma rents out a furnished room in her London flat for £600 per month.
| Item | Calculation |
|---|---|
| Monthly rent | £600 |
| Annual rent | £600 × 12 = £7,200 |
| Tax-free threshold | £7,500 |
| Tax due | £0 |
Emma’s £7,200 is fully covered by the £7,500 allowance. She pays no tax, files no tax return, and keeps the full amount. The rent covers her mortgage contribution, council tax, and bills with money to spare.
Impact on Benefits
Renting out a room can affect your benefits. The rules depend on which benefits you receive.
Housing Benefit / Housing Cost Element of Universal Credit
| Situation | Impact |
|---|---|
| You own your home and receive Housing Benefit | Rental income may be treated as income, reducing your benefit |
| You rent and sublet a room (with landlord’s permission) | Rental income may affect your Housing Benefit |
| You receive Universal Credit (housing costs element) | Rental income is treated as unearned income |
Important: Report any rental income to the DWP or your local authority. Failure to do so is benefit fraud.
Council Tax Reduction
| Situation | Impact |
|---|---|
| You live alone and get a single person discount | Taking in a lodger may affect your single person discount |
| You already receive Council Tax Reduction | Rental income may affect your means-tested reduction |
Other Benefits
| Benefit | Impact |
|---|---|
| Pension Credit | Rental income counts as income and may reduce your entitlement |
| Tax Credits | Rental income counts as income |
| Attendance Allowance | No impact |
| Disability Living Allowance | No impact |
Impact on Council Tax
Single Person Discount
If you live alone and receive a 25% single person discount, taking in a lodger means you no longer live alone. You must notify your local authority, and you’ll lose the discount.
Example:
| Council Tax Band | Annual Bill | Single Person Discount (25%) | With Lodger (No Discount) |
|---|---|---|---|
| Band D | £2,000 | £1,500 | £2,000 |
| Band C | £1,700 | £1,275 | £1,700 |
Losing the single person discount costs you £500 per year on a Band D property. Factor this into your calculations.
Council Tax Band
Taking in a lodger doesn’t change your council tax band. The band is based on the property’s value in 1991 (or 2003 in Wales), not on how many people live there.
Council Tax Liability
You remain liable for the full council tax bill. The lodger doesn’t become jointly liable (unless they’re named on the bill by agreement with the council).
Other Things to Consider
Home Insurance
Most standard home insurance policies don’t cover you for letting rooms. You need to:
- Notify your insurer
- Check if your policy covers lodgers
- Get specialist房东 insurance if needed
- Ensure the policy covers the rented room and its contents
Failing to disclose a lodger to your insurer could void your policy.
Mortgage
Check your mortgage terms before taking in a lodger:
- Most residential mortgages allow you to take in a lodger
- Some require written permission from the lender
- Buy-to-let mortgages don’t allow you to live in the property
- Help to Buy equity loan schemes may have restrictions
Tenancy Agreement
Even for an informal arrangement, put the terms in writing. Include:
- Rent amount and payment date
- What’s included (bills, internet, meals)
- Notice period for ending the arrangement
- House rules (guests, smoking, noise)
- Deposit amount and conditions
A written agreement protects both you and your lodger.
Tax Return
If your rental income is under £7,500 and you’re not otherwise required to file a Self Assessment, you don’t need to declare it. If your income exceeds £7,500, you must declare it on your tax return.
Common Mistakes
1. Not Checking Mortgage Terms
Some mortgages prohibit lodgers. Check before you advertise — breaching your mortgage terms could result in repossession.
2. Forgetting to Notify Your Insurer
If your home insurance doesn’t cover lodgers, you’re not insured. Always notify your insurer first.
3. Losing the Single Person Discount Without Realising
Taking in a lodger means you no longer qualify for the 25% single person discount. This can reduce or eliminate the financial benefit of letting a room.
4. Not Reporting Income to the DWP
If you receive means-tested benefits, rental income counts as income. Failing to report it is benefit fraud.
5. Not Putting Arrangements in Writing
Even a friendly arrangement can go wrong. A written agreement protects both parties and sets clear expectations.
6. Choosing Option A When Option B Is Better
If your expenses are high, Option B may result in a lower tax bill. Always compare both options before deciding.
Renting a Room vs Buy-to-Let
| Feature | Rent a Room | Buy-to-Let |
|---|---|---|
| Tax-free income | Up to £7,500 | None |
| Allowable expenses | Option B: actual expenses | Full deduction of expenses |
| Mortgage interest relief | 20% tax credit | 20% tax credit |
| Stamp Duty | None (you live there) | 3% surcharge on additional properties |
| Capital Gains Tax | Exempt (main home) | Payable on disposal |
| Regulation | Minimal | Landlord licensing, safety certificates |
| Management | You live there | Agent or self-managed |
| Risk | Lower (you’re present) | Higher (vacant property) |
Key Takeaways
- The Rent a Room Scheme lets you earn up to £7,500 per year tax-free from letting a furnished room in your main home
- You must live in the property and the room must be furnished
- If income exceeds £7,500, choose Option A (keep £7,500, tax the rest) or Option B (deduct expenses, tax the profit)
- Taking in a lodger may affect your single person discount on council tax, Housing Benefit, and Universal Credit
- Check your mortgage terms and home insurance before taking in a lodger
- Put the arrangement in writing, even for informal lodger agreements
- If you’re a basic rate taxpayer earning under £7,500, there’s no tax to pay and no return to file
This article is for general information only and does not constitute tax or financial advice. Tax rules can change, and individual circumstances vary. For personalised guidance, consult a qualified tax adviser or financial planner.