Would you like to earn up to £7,500 a month tax-free? If you have a spare bedroom – taking in a lodger might prevent you running short of cash at the end of the month. Even the unemployed can supplement their universal credit with income from the Rent a Room Scheme and reduce their need for loans. Continue reading to find out how to turn a spare room into spare cash (with less tax)!
Rent a room Scheme
According to the government’s ‘Rent a Room’ scheme, you’re allowed to earn up to £7,500 a year before being taxed on this income. The scheme is only for a furnished room with communal areas such as the kitchen and living areas. One doesn’t need to own their home to rent out a room, one can even rent out a room if they rent their home or if they live in a council home.
This article will give you the legal review of things to know before you take in a lodger. It will also give you an idea about how much to charge your lodger by telling you about the financial implications (for example taxes) you should take into account.
Rent A Room Relief
Make sure you get the income without the taxes by ensuring the income you get will be covered under the Rent a Room Scheme.
Once you know how to get a lodger tax free, you will know how much you can charge your lodger without paying tax.
|Annual Income from Lodging||Rent A Room Relief|
|Less than £7,500 (£3,750 if shared)||Automatic exemption – no need to a file tax return. Even if you are already filing a tax return, there is no need to report this income.|
|More than £7,500 (£3,750 if shared)||
Opt into Rent a Room Scheme and receive a reduction on taxes.1
Who Can Rent Out A Room?
Before you start searching for a lodger, you should check if you’re allowed to rent out a room in your home. The answer to this will depend on whether you own or rent your home and what type of tenancy you have.
Can you take in a lodger? Use the free assessment tool below to find out.
Taking in a lodger: Effect on Taxes and Benefits
It is important to know the financial implications of taking in a lodger before you decide on a price. This way you can prepare a rent a room price that won’t exceed tax-exempt thresholds but also cover the additional tax cost of a lodger.
For example, If having a lodger means you no longer get 25% single occupant reduction on Council Tax, you might want to include your lodger’s share of council tax in their rent or agree for them to pay their own.
If you earn less than £7,500 income a year from renting out a room, it won’t affect your universal credit, but taking in a lodger might still affect your benefits (e.g. housing benefit) and taxes. For this reason, before you decide to take in a lodger, you should educate yourself on the financial implications of taking in a lodger.
Before you take in a lodger: Legal Requirements
Right to Rent: Lodger Background Check
Performing a background check is not just a precaution – its a legal necessity. You are obligated by law to ensure your tenant has the right to rent.
If you take in someone you know or suspect doesn’t have a right to rent – you might face a 5-year prison sentence or an unlimited fine.
By law, private landlords are required to check the immigration status of tenants and this obligation is extended to you when you take in a lodger. Even if you have your own landlord, you would still be the one liable to the £3,000 fine!
No fear though – Gov.uk has prepared a guide on how to check a lodger’s right to rent.
Lodgers and insurance
You should also check the terms and conditions of your home contents insurance. Taking in a lodger might not be in the Terms
and Conditions, so it’s better to inform your insurer and even pay extra premiums as you don’t want to invalidate your policy and risk not being covered. Furthermore, you should think about whether you want to include your lodger’s possessions in your policy, or if you would rather they arrange their own insurance cover?
Personal Loans Now prepared a printable infographic for the readers of our personal finance blog. Now you can check off your legal obligations as you complete them. Share it with your fellow landlords – I am sure they will appreciate it.
Before you even take in a lodger, know the rights of your lodgers so you can be prepared to meet them. Although under UK law, lodgers have fewer rights than tenants, you are still accountable as a landlord!
No article about lodger legalities would be complete without the scariest part – evicting a lodger.
If you want your lodgers to leave, you should give them ‘reasonable notice’. Once fixed term agreement comes to an end or after the notice period has passed, one can simply change the locks on lodgers when they are out. You cannot use or threaten to use physical force to evict lodgers – doing so would be a criminal offence. Only if they refuse to leave will you need a court order to evict them. If your lodger under a fixed term agreement wants to leave before the end of the fixed term, they are liable to pay the rent for the whole period unless they get your consent.
- If you are the sole owner of your home, the amount you can earn from renting out room without paying tax totals at £7,500 a year, £144.23 a week or £625 a month.
- If you share ownership of your home, you can make up to £3,750 a year without paying tax. This totals at £72.11 a week or £312 a month.
If you have more than one lodger, divide the above amounts by the amount of lodgers to work out how much to charge each one.
It depends on the arrangement with the landlord. Some landlords include in the rent their lodger’s share of the council tax or arrange for the lodger to pay their own share.
Lodgers will also pay less council tax they:
- are a full-time student
- receive certain benefits
- pay council tax somewhere else (mainly applies to Monday to Friday lodgers).
Furthermore, taking in a lodger will only affect council tax if the owner was the sole resident before then and the recipient of the 25% reduction – otherwise, council tax is paid per property and not per person .
As many as you want. When you take in more than 2 lodgers, however, your home will convert into a House with Multiple Occupation (HMO). House with Multiple Occupation. HMOs have additional health and safety requirements. Furthermore, you cannot rent out your entire home, and all rented out rooms must share the kitchen and other communal areas (no separate flats).
If the income you receive from the lodger exceeds £7,500 a year, you have to report a lodger on your tax return. However, you might want to look into how to declare it: Is under the Rent A Room Scheme? Is it a border or subtenant? In some circumstances it might be worthwhile NOT opting into the Rent a Room Scheme and declaring the income differently! Therefore it is advisable to read up on how to declare a lodger on a tax return.
Therefore it is advisable to read up on how to declare a lodger on a tax return.
Yes, but you need to read your contract first or contact your landlord to ensure that there are no clauses are prohibiting subletting.
If you have a mortgage, you should check with your mortgage provider. Some of them have a clause about subletting
While council house cannot rent out the entire property, they may be able to rent out a room. The right to rent out a rent varies between tenancy types.
Secure tenant or Flexible tenant: You can take in a lodger without needing to ask permission.
Assured and Assured shorthold tenant: Every contract is different so check your tenancy agreement.
Introductory tenant: Although no specific legal right, you might have a contractual right, so check the contract. If the contract makes no mention of renting out a room, then you may have a loophole!
Protected tenant: Check your tenancy agreement. If there is nothing prohibiting lodgers it than no need to ask the landlord
Demoted and Family Intervention tenants: High chance you won’t be allowed. Check your tenancy agreement though and if nothing is prohibiting it then…
Before you take in a lodger, be aware of the financial implications. Is it worth the £7,500 tax-free income if it means you will get fewer benefits or pay more council tax? It is also important to take into account the Rent a Room Tax Relief and the lodger’s effect on tax credits – especially when deciding on how much to charge a lodger.
Most importantly – know the law! You can keep things legally sound when you make sure to have permission to rent out a room, perform the right to rent check, declare the lodger correctly on a tax return, notify the right authorities and you check off all items on our Landlords Checklist. It is also crucial that you are aware of your lodger’s rights – especially if it comes to an eviction. Renting out a room will definitely help you through the month and reduce the need for personal loans. With the UK housing crisis going on, its a good time to take in a lodger.