Taking Advantage of the Rent-a-Room Scheme: How to Earn Tax-Free Income from Letting Out a Room in Your Home

With the cost of living and interest rates still high, many homeowners are exploring ways to boost their income. One often-overlooked solution is letting out a spare room — and thanks to the UK’s Rent-a-Room scheme, you can earn up to £7,500 a year tax-free by doing so.

Whether you’re considering taking in a lodger, running a small-scale bed and breakfast, or letting out a room to a student, this scheme can provide a valuable source of additional income with minimal tax reporting.

In this guide, we explain how the scheme works, who it’s for, what counts as qualifying income, and how to make the most of your tax-free threshold.

What Is the Rent-a-Room Scheme?

The Rent-a-Room scheme allows individuals who let out furnished accommodation in their main home to earn up to £7,500 a year tax-free (or £3,750 each if income is shared). This limit applies to gross receipts, meaning the total rent you receive before deducting any expenses.

If your income from letting is below this threshold, you won’t pay tax and don’t even need to report it to HMRC.

Who Can Use the Scheme?

The scheme is available to:

• Owner-occupiers who let out rooms in their main home
• Tenants, provided they have permission from their landlord
• Those offering services such as cleaning, meals, or running a B&B
• Individuals renting to students, provided the room is furnished and residential

You must live in the property — it needs to be your main home. If you are living elsewhere or abroad and rent out rooms in a home you no longer occupy, the scheme does not apply.

You also cannot claim rent-a-room relief if:

• The room is unfurnished
• It’s used for business purposes (e.g. rented as an office)
• You’re renting out a separate flat or annex — this may be considered a separate dwelling

That said, minor use of the space (e.g. the lodger studying or working from home part-time) does not disqualify you.

How Much Is Tax-Free?

If only one person receives the rental income:

• The tax-free limit is £7,500 per tax year

If two or more people (e.g. a couple) share the income:

• Each has a limit of £3,750, for a combined total of £7,500

This limit applies per person, not per property. For example, four housemates could each earn up to £3,750 tax-free if they sublet part of the house they live in.

Example 1: Below the Rent-a-Room Limit

Louise lets a furnished spare room in her main residence and receives £500/month in rent.

• Total annual income: £6,000
• Expenses: £450

Since her gross income (£6,000) is below the £7,500 threshold, she:

• Pays no tax
• Doesn’t need to report the income to HMRC
• Can ignore expenses (they’re irrelevant under the scheme)

However, if Louise had made a loss, the scheme would not be beneficial — see below.

Choosing Between Methods: A or B

When rental income exceeds the rent-a-room threshold, you have a choice in how to calculate taxable profit:

Method A – Traditional Approach

• Declare your full rental income
• Deduct actual expenses (cleaning, utilities, repairs, etc.)
• Pay tax on the resulting net profit

This is the default method used by HMRC.

Method B – Rent-a-Room Election

• Simply deduct £7,500 (or £3,750) from your gross income
• No need to record expenses
• Pay tax on the remainder

When is each method better?

• Use Method A if your expenses exceed £7,500 (you’ll pay tax on a smaller profit)
• Use Method B if your expenses are low — and gross receipts only slightly exceed the threshold

Example 2: Choosing the Right Method

Jas lets a room for £800/month, earning £9,600/year. Her expenses are £1,000/year.

• Method A: £9,600 – £1,000 = £8,600 taxable profit
• Method B: £9,600 – £7,500 = £2,100 taxable profit

Clearly, Method B is the better option here. But if her expenses had been, say, £8,000, Method A would be better.

Important: If you want to use Method B, you must tell HMRC by 31 January following the end of the second tax year (i.e., one year after the normal tax return deadline).

So, for the 2024/25 tax year, the election must be made by 31 January 2027.

Changing Between Methods

You can switch methods every year, depending on which gives you the best result — but you need to notify HMRC within the same deadline.

If you made an election for Method B last year, it will continue unless you withdraw it. If you want to switch back to Method A, you must withdraw the election by 31 January 2027 for the 2024/25 tax year.

What If You Move House During the Year?

The £7,500 (or £3,750) limit applies per tax year, not per property.

So, if you let out a furnished room in your old house for part of the year, and in your new home for the rest:

• Add the total income from both homes together
• Compare the total to your annual allowance

If the total exceeds the limit, you’ll need to use Method A or B to calculate the tax — whichever gives the better result.

What About Capital Gains Tax (CGT)?

One of the best things about the rent-a-room scheme is that it does not affect your Principal Private Residence (PPR) relief.

So long as you’re living in the property as your main residence:

• Letting a room under the scheme does not reduce your CGT exemption when you sell
• You don’t need to claim lettings relief, nor does it impact it

This makes the scheme especially attractive to homeowners looking to make use of spare space without compromising long-term tax relief.

When the Scheme Is Not Beneficial

If your rental income is below the threshold but you incur a loss, you may prefer not to apply the rent-a-room scheme.

Why? Because under the scheme:

• You cannot carry forward a loss to offset future rental income
• You lose the tax benefit of those losses

In such cases, opt out of the scheme by telling HMRC on your tax return. The deadline is still 31 January following the end of the second tax year.

Final Thoughts: Easy Income, Minimal Admin

The Rent-a-Room scheme is one of the most straightforward tax reliefs available to homeowners and tenants alike. With potential for up to £7,500 of tax-free income, it offers a low-risk way to supplement earnings, utilise spare space, or trial property letting without entering the full complexities of rental property taxation.

At Merranti, we help clients assess which letting strategies are best for their situation — and ensure they use the right method each year to minimise tax and maximise relief.

Thinking of taking in a lodger? Let us help you structure it right from day one.