Earn £4250 TAX FREE from your spare room!
Rent out a room in your home and you can earn over £350 per month TAX FREE and more besides - in some parts of London, rooms can command rents of up to £800 per month!
Tax on rental income
If you let out all or part of a property (including your home), how you're taxed on the rent depends on the type of letting.
The 'Rent a Room' scheme
If you are a live in landlord letting furnished accommodation in your own home to a lodger and your total income comes to £4,250 or below (£2,125 if letting jointly), you can get this income tax-free under the 'rent a room' scheme. You'll have to pay tax on anything over £4,250. Or you can choose not to use the scheme if you'd prefer to pay tax under the rules for residential lettings and therefore offset some income against allowable expenses.
Tax on residential lettings
Letting residential investment property is treated as running a business - even if you only let out one property. Whether you let one or several, you're taxed on the overall 'net profit'. You work this out by:
- Adding together all your rental income
- Adding together all your allowable expenses
- Taking the allowable expenses away from the income
Letting all or part of your home
If you let your home while you live somewhere else, your profits from the rent are worked out and taxed in the same way as for residential investment lettings. The same rules apply if you let part of your home and choose not to use the 'Rent a Room' scheme. If you let part of your home this way, you can include a percentage of household costs like gas and electricity when you work out your allowable expenses.
Expenses and allowances on income from property
If you let out property you can deduct certain expenses and tax allowances from your rental income (unless it's under the 'Rent a Room' scheme) to work out your taxable profit (or loss). If you have several UK residential lettings you pool the income and expenses together. Holiday letting and overseas profits must be worked out separately.
Allowable expenses
- Letting agent's fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountants fees
- Buildings and contents insurance
- Interest on property loans
- Maintenance and repairs (but not improvements)
- Utility bills
- Rent, ground rent, service charges
- Council tax
- Services you pay for, eg cleaning
- Direct costs of letting the property, eg phone calls, stationary and advertising
Record keeping & declaring & paying tax on rental income
If you let out property, you'll have to keep records of your income and expenses for at least six years - whatever type of letting it is. Even though you can't claim expenses when you use the Rent a Room scheme, it may still be worth keeping proper records. You'll need them if you decide to opt out of the scheme later.
If your taxable income from rent is £15,000 or more in a year you must declare it on the full Self Assessment tax return. If it is under £15,000 you may be able to complete a shorter four-page return. If it's under £2500 your Tax Office may be able to collect any tax you owe through PAYE (Pay As You Earn) if you already pay tax this way.
All information taken from direct.gov.uk
For more information, see our book "The Essential Guide to Flatsharing"