Q. I have recently been made unemployed due to the pandemic and intend to rent a room out in my home to get some extra income. What are the tax implications if this is my only source of income?
A: HMRC's Rent-a-Room scheme 2020 is an optional exemption scheme, which allows individuals to receive up to £7,500 of tax-free gross income (income before expenses) from renting out furnished spare rooms in their only or main home. The exemption is halved where the income is shared with a partner or someone else. Broadly, providing the income is below the annual threshold, it does not need to be reported to HMRC. If this income exceeds the threshold, it must be reported to HMRC via the self-assessment tax return. To determine whether to join the scheme, the following methods of calculation should be compared:
- Method A: paying tax on the profit from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
- Method B: paying tax on the gross amount of receipts (including receipts for any related services they provide) less the £7,500 exemption limit.
If you elect (within the time limit) for Method B to apply, the first £7,500 will be tax-free, and the remainder will be covered by your income tax personal allowance, so will be tax-free. The remainder is calculated as your gross rental receipts over and above the £7,500 figure, without any deduction for expenses.
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