What Is the Rent a Room Scheme and How Does It Work

Thinking about renting out a spare room? This guide explains the Rent a Room Scheme, how it works, who qualifies and how to use the £7,500 tax free allowance effectively.

The Rent a Room Scheme is one of the most generous and straightforward tax reliefs available to individuals in the UK. It allows you to earn money from renting out a furnished room in your main home without paying tax on a large portion of that income. In my opinion this scheme is hugely underused because many people assume that renting out a room means dealing with complicated landlord rules, extra tax forms or strict tenancy laws. The reality is that the Rent a Room Scheme is simple, flexible and designed to encourage people to make better use of their homes.

This guide explains exactly what the Rent a Room Scheme is, how it works, who qualifies, how to register, when you should opt in or out, how to calculate your profit, how the exemption interacts with expenses and what happens when your income exceeds the threshold. I will also include practical examples because this makes it easier to see whether the scheme suits your situation.

By the end you will know exactly how the Rent a Room Scheme works and whether it is right for you.

What Is the Rent a Room Scheme

The Rent a Room Scheme is a government initiative that lets you earn rental income tax free when you rent out a furnished room in your main home.

Key features:

  • You can earn up to £7,500 per year tax free

  • If you share the income with someone else the allowance is £3,750 each

  • The room must be in your main home

  • The room must be furnished

  • You can rent to lodgers, students or short term guests

  • You do not need to complete complicated tax forms if you stay within the allowance

In my opinion the key advantage is that the £7,500 allowance applies to income, not profit. This keeps the rules incredibly simple.

Who Can Use the Rent a Room Scheme

You can use the scheme if:

  • You own your home

  • You rent your home and your tenancy agreement allows subletting

  • You live in the property as your main residence

  • You rent out a furnished room

  • You take in a lodger, student or long term guest

  • You rent the room privately or through a platform

You cannot use the scheme if:

  • The room is unfurnished

  • You do not live in the property

  • You let an entire property

  • You run the accommodation as a business

  • You let office space or storage space

  • You let part of your home to your own business

This scheme is designed for people who want to rent out a spare room rather than professional landlords.

What Counts as a Main Home

To qualify the property must be your main residence. This means:

  • You live there most of the time

  • It is your registered address

  • Bills and correspondence go there

  • You would consider it your primary home

You cannot use the scheme for:

  • Second homes

  • Holiday homes

  • Buy to let properties

  • Overseas properties

In my opinion this is one of the simplest eligibility requirements because HMRC applies a common sense approach.

What Counts as a Furnished Room

A furnished room typically includes:

  • A bed

  • A wardrobe

  • Storage furniture

  • Basic lighting

  • A desk or table if suitable

The room must be suitable for living in. You cannot claim the allowance for letting:

  • A garage

  • A shed

  • A storage area

  • A cupboard

  • An office space

If the room is furnished to a reasonable domestic standard you qualify.

How Much Can You Earn Tax Free Under the Rent a Room Scheme

The tax free allowance is:

  • £7,500 per year if you are the only recipient of the rent

  • £3,750 per person if you share the rental income with a partner or joint owner

This allowance covers:

  • Rent paid by the lodger

  • Any contributions for bills

  • Any payments for services such as cleaning or meals

The allowance applies to gross income, not profit.

This is what makes the scheme so attractive for people with low running costs.

What Income Counts Under the Scheme

You must include:

  • Rent

  • Utility contributions

  • Broadband contributions

  • Cleaning fees

  • Meals you provide

  • Any service charges

You do not include:

  • Refundable deposits

  • Charges your lodger pays directly (for example their own phone bill)

How the Rent a Room Scheme Works in Practice

When you rent out a room in your home you can choose between:

  • The Rent a Room Scheme

  • The normal property income rules

Under the scheme:

  • You receive up to £7,500 tax free

  • You do not deduct expenses

  • You do not declare anything to HMRC if the income is below £7,500

  • If income is above £7,500 you must complete Self Assessment and choose your method

Under the normal rules:

  • You declare rental income

  • You deduct allowable expenses

  • You pay tax on the profit

  • You cannot use the £7,500 allowance

The choice depends on your costs and income.

When You Should Use the Rent a Room Scheme

The scheme is usually best when:

  • You earn less than £7,500 per year from the room

  • Your expenses are low

  • You want a simple, fuss free method

  • You do not want to keep detailed expense records

  • You want predictable tax treatment

Typical users include:

  • Homeowners with a spare bedroom

  • Hosts taking in students

  • People renting to lodgers during weekdays

  • Individuals who want a straightforward tax setup

When You Should NOT Use the Rent a Room Scheme

You may want to opt out if:

  • Your rental expenses are high

  • You rent the room only part of the year

  • You provide substantial services

  • You have high mortgage interest or repair costs

  • Your profit under normal rules would be lower than under the scheme

The Rent a Room Scheme does not let you deduct expenses.

If your expenses exceed your income the normal rules may be more tax efficient.

How to Calculate Your Profit Under the Scheme

If your income is below £7,500:

  • Your profit is automatically treated as £0

  • You pay no tax

  • You do not need to file a tax return

If your income is above £7,500:

You have two options:

Option 1: Use the scheme
Profit = gross income minus £7,500 allowance

Option 2: Opt out of the scheme
Profit = income minus allowable expenses

You choose whichever method gives you the lower taxable profit.

Practical Examples

Example 1: Income under the threshold

  • Rent from lodger: £550 per month

  • Annual income: £6,600

Income is below £7,500 so:

  • No tax

  • No Self Assessment

  • No need to keep expense records

  • Rent a Room Scheme applies automatically

Example 2: Income above the threshold

  • Rent: £800 per month

  • Annual income: £9,600

You compare two methods:

Rent a Room Scheme:

  • Taxable profit = £9,600 minus £7,500 = £2,100

Normal rules:

  • Income £9,600

  • Expenses £3,000

  • Taxable profit = £6,600

Using the scheme saves tax.

Example 3: High expenses scenario

  • Rent: £550 per month

  • Income: £6,600

  • Expenses: £4,500

Under the scheme:

  • Profit = £0 (income under £7,500)

Under normal rules:

  • Profit = £2,100

The scheme is better.

Example 4: Very high décor and maintenance costs

  • Rent: £10,000 per year

  • Expenses: £7,000

Under the scheme:

  • Profit = £2,500

Under normal rules:

  • Profit = £3,000

The scheme is better.

If expenses were £9,500 the normal rules would produce a lower profit.

In my opinion it always pays to calculate both methods when income exceeds £7,500.

How to Register for the Rent a Room Scheme

If your income is under £7,500:

  • You do not need to register

  • The scheme applies automatically

If your income is above £7,500:

  • You must register for Self Assessment

  • You then choose the Rent a Room Scheme in the property section

To opt out:

  • Tick the opt out option on your Self Assessment

  • You must opt out every year you want to use normal rules

What Counts as a Lodger

A lodger is someone who:

  • Lives with you in your main home

  • Shares common areas such as the kitchen or bathroom

  • Pays rent

  • Has a licence rather than a tenancy

A lodger is not:

  • Someone who rents a separate self contained unit

  • Someone who occupies property you do not live in

  • Someone who has exclusive access to a separate floor or annex

If you rent a separate flat or annex you cannot use the scheme.

Does the Scheme Apply to Short Term Lets

Yes, as long as:

  • It is your main home

  • The room is furnished

  • You live there for the majority of the year

  • The letting is not a separate holiday let business

This means you can use the scheme for:

  • Airbnb guests staying in your spare room

  • Short term workers

  • Weekend guests

  • Students during term time

You cannot use the scheme for:

  • A separate annex on Airbnb

  • A holiday cottage

  • A buy to let property

How the Scheme Interacts With Universal Credit and Benefits

Income from renting out a room may affect:

  • Universal Credit

  • Housing Benefit

  • Council Tax Reduction

It usually does not affect:

  • Personal Independence Payment

  • Disability Living Allowance

  • State Pension

You should check the rules with your local authority.

What Happens If You Sell Your Home After Using the Scheme

Normally your home is exempt from Capital Gains Tax because of Private Residence Relief.

Using the Rent a Room Scheme does not affect this exemption.

You will still receive full Private Residence Relief unless:

  • You let out a self contained area

  • You have exclusive areas for the lodger

  • You run the letting as a business

In most cases letting a room does not affect CGT relief.

Common Mistakes People Make

  • Thinking the £7,500 is per property rather than per person

  • Renting out an entire home and trying to claim the scheme

  • Not realising the room must be furnished

  • Claiming expenses while using the Rent a Room Scheme

  • Forgetting to opt out when needed

  • Not treating utility contributions as part of income

  • Believing Airbnb automatically qualifies (it must be a room in your home)

In my opinion the biggest misunderstanding is that you cannot deduct expenses under the scheme. It is a flat allowance system.

Conclusion

The Rent a Room Scheme is a simple and generous tax relief that allows you to earn up to £7,500 per year tax free by renting out a furnished room in your main home. It applies automatically if you stay within the allowance and gives you a choice between the scheme and normal property rules if your income exceeds the threshold. The scheme is flexible, easy to use and ideal for people who want a straightforward tax setup without the complexity of full landlord accounting.

In my opinion the scheme is one of the most accessible and useful tax reliefs for individuals with spare space in their home. As long as you understand the rules and calculate both methods when your income is high you can make the best financial decision for your situation.