Is your spare room worth thousands a year?

Thanks to the government’s Rent-a-Room Scheme, you can earn up to £7,500 by sharing your home with a lodger, without having to pay tax on that extra cash.

With more than four in 10 homeowners aged 65 or over saying they live in a house which is 'larger than they need’, the scheme encourages people with spare rooms to share their space with others, while also meeting the need for affordable housing.

Forget everything you remember about lodgers from the sitcom Rising Damp. Opening your home can be a brilliant way to boost your coffers – easing the cost of living or giving you funds for extra fun – as well as providing company.

What is Rent-a-Room?

The Rent-a-Room Scheme allows homeowners or tenants (if their lease allows) to make extra money by letting a spare room to a lodger. The room must be furnished to qualify.

It gives you a £7,500 tax-free allowance on the money you make, or £3,750 if you share that income with someone else (perhaps a person who owns the home with you).

The great news is if you earn under the £7,500 threshold per year (including the rent and any extra charges), you don’t need to do anything and the allowance will be automatic.

That means using the Rent-a-Room Scheme can be a tidy earner if you’re just taking in a lodger through parts of the year.

However, if you make more than that from the rental, you’ll need to fill out a tax return.

Who could use the Rent-a-Room Scheme?

“[The scheme] is great for people who rent out their room for less than the allowance and who don’t want the hassle of filling in a tax return,” says Matt Hutchinson, Director at Spareroom, a site which matches lodgers to lodgings.

“It’s nice and simple for people who’d like a bit of extra money but don’t want to delve too deep into the admin side of things.”

If your total income from rental is more than £7,500 from renting out your room, you need to tell HMRC, fill out a tax return and pay tax on the extra.

It’s worth noting that, if you’re using the Rent-a-Room Scheme, any expenses related to the rental won’t be deducted from the amount you earn.

Another option is to opt out of Rent-a-Room tax relief completely and declare the income you make from your rental instead.

This is a more commonly-used method if you want to claim for any expenses incurred in making the room rent-worthy – perhaps with any redecoration or renovations – but you’ll need to let HMRC know within one year of 31 January following the end of the tax year.

If you choose to go down that route, you’ll need to fill in a tax return to declare any rental income and can deduct relevant expenses and capital allowances, paying tax in the normal way.

You may have to pay capital gains tax when you come to sell the property if you’ve let out your home using this method.

Mulling it over? Here’s what to think about

Being able to earn £7,500 tax-free is not to be sniffed at, but don’t rush to make up the spare bed until you know the facts.

The income from renting out your room might affect any benefits you receive, so it’s worth checking in advance. While you can make up to £7,500 from the scheme without it affecting universal credit, it could have an impact on pension credit or housing benefit, as these are means tested.

If you live on your own and get the 25% single person’s council tax reduction, you’ll lose this if your home is your lodger’s main residence.

If you charge for meals or laundry, you also need to add that into your rental income and, if it takes you over the £7,500, you’ll have to pay tax on the extra.

You might need to update your insurance, especially contents insurance, if you take a lodger, and if you still have a mortgage, check if the terms and conditions state whether you need to let them know before renting out part of the property.

Once you’ve found a potential lodger, if you're in England you must perform Right to Rent checks to see if they’re legally allowed to live in the UK, and keep the relevant records to show you’ve done this.

For peace of mind, you may also want to do your own background checks.

Andy Scott, from Herefordshire, started renting out a double room three years ago through SpareRoom. He uses the Rent a Room scheme but earns just over the £7,500, so declares the extra on his tax return.

“I’d got divorced, wanted to keep the property, but needed some extra income to do so. That was my motivation.

“But after retiring a couple of years ago, the social side has become more important. I’ve enjoyed meeting different people and having them around to chat to.”

Andy’s lodgers have access to their own bathroom and living room.

“If there’s problems from either side, it’s important to raise them, but overall it’s been a very positive experience.”

Ready to rent? How to get started

First, think about which room in your house you'll be renting out and whether you might need to switch around your own living arrangements to be able to offer the right space. Then get a sense of what the going rate is for a room in your area.

According to SpareRoom, the average room rent in the UK is £749 per month (£670 per month if you exclude inner London). Obviously, this will vary according to where you live and how big the room is. Look at rooms in your area to get a more accurate idea of what you might charge, to help you plan your potential finances.

But, says Spareroom’s Hutchinson, don’t think of it solely as a financial transaction.

He says: “It’s actually more about people. Of course, some just do it for the money, but many enjoy the company. For people who are facing an empty nest, it can be nice to have someone around.

“So, think about what kind of person you want to live with and make that clear in your advert, so you get the right people applying.

“Consider all the possible pitfalls, and that will lessen the chances of them happening.”

The key is to be really clear about your expectations of what you are looking for in a lodger and what your house rules may look like.

If you're older, living alone and worried about being able to keep up with all the household chores, you could even look for a lodger who is happy to take on heavier housework or shopping in return for, say, having meals cooked, and/or cheaper rent.

Always have an agreement in writing between you and your lodger. This will protect you both and help sidestep any potential misunderstandings.

(You can see a sample agreement from HomeProtect, and create your own through places like the National Residential Landlords Association or Spareroom.)

Key takeaways

Taking in a lodger can be a great way to earn some extra money, but you need to think about the logistics and how far you’re willing to share your home with someone else.
Don’t think about taking a lodger as a purely financial move – consider how having someone else around will impact your life and decide what kind of person you’d like.
It can be a hassle to sort all the paperwork at the beginning, but can help create clear boundaries and rules to avoid potential issues later on.
Get it right, and there’ll be benefits beyond a healthier bank balance.