The UK tax system offers several legitimate opportunities to increase your income while remaining compliant with HMRC. One of the most attractive and often overlooked options is the Rent a Room Scheme, which allows homeowners and tenants to earn tax-free income by letting out a furnished room in their main residence.
For the 2025/26 and 2026/27 tax years, the scheme allows eligible individuals to earn up to £7,500 per year tax-free. When combined with the standard Personal Allowance of £12,570, this effectively means that some individuals can earn up to £20,070 tax-free, depending on their circumstances.
At Lucas Prestige Accountants, we regularly advise clients on how to structure their income efficiently and take advantage of available tax reliefs. Understanding how this scheme works can help you make better financial decisions.
Key Rules of the Rent a Room Scheme
The Rent a Room Scheme is designed to be simple and accessible. However, it is important to understand the core rules before taking in a lodger.
Tax-Free Threshold
You can receive up to £7,500 per year tax-free from renting out furnished accommodation in your main home.
Joint Ownership
If you share the rental income with another person, such as a spouse or joint owner, the allowance is divided. Each person can earn up to £3,750 tax-free.
Gross Income Basis
The threshold applies to your gross rental income before expenses. This includes:
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Rent payments
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Charges for meals
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Laundry services
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Cleaning or other additional services
It is important to remember that this limit applies to total income received, not your profit.
Automatic Tax Exemption
If your gross rental income is £7,500 or less per year, the exemption usually applies automatically. In most cases, you do not need to inform HMRC or include this income in your Self Assessment tax return. However, it is still important to keep accurate records in case HMRC requests evidence in the future.
Eligibility Requirements
To qualify for the Rent a Room Scheme, certain conditions must be met.
Main Residence
The room must be located in your only or main home. The scheme does not apply to properties that are fully rented out or used solely as investment properties.
Furnished Accommodation
The room must be provided fully furnished. Unfurnished accommodation does not qualify for the relief.
Landlord Status
You do not need to own the property. Both owner-occupiers and tenants can use the scheme, provided that the tenancy agreement allows subletting and the landlord has given permission where required.
Exclusions
The scheme does not apply to:
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Self-contained flats or annexes with their own separate front door
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Rooms used primarily for business purposes, such as offices or consulting spaces
What Happens If Your Income Exceeds £7,500?
If your gross receipts exceed the annual threshold, you must report the income through a Self Assessment tax return. At this point, you can choose between two different taxation methods.
Method A – Tax on Actual Profit
Under this method, you calculate your taxable profit by deducting allowable expenses from your rental income. This may include a portion of utility bills, maintenance costs, or other relevant expenses.
Method B – Simplified Method
Alternatively, you can choose to pay tax only on the income above the £7,500 threshold. In this case, you cannot deduct any expenses. This option is often simpler and can be beneficial if your costs are low.
You can switch between these methods each tax year, depending on which approach results in a lower tax liability.
Important Considerations Before Taking in a Lodger
Although the scheme offers clear tax advantages, there are several practical and financial factors to consider.
Mortgage and Insurance
Before letting a room, you should check your mortgage agreement and home insurance policy. Some lenders and insurers require notification or specific conditions when taking in a lodger.
Council Tax
If you currently receive the 25% single person discount on Council Tax, this may be withdrawn once a lodger moves in. This could increase your overall housing costs.
Impact on Benefits
Rental income may affect certain means-tested benefits. In many cases, income up to the £7,500 allowance is ignored for Universal Credit, but individual circumstances vary and professional advice is recommended.
Why Professional Advice Matters
The Rent a Room Scheme is straightforward in principle, but every situation is different. Your wider tax position, employment status, and long-term financial goals should all be considered before making a decision.
At Lucas Prestige Accountants, we help clients understand how to maximise their tax-free income while remaining fully compliant with HMRC regulations. Whether you are considering taking in a lodger or already receiving rental income, professional guidance can ensure you make the most efficient choice.