From 6 April 2016, the annual Rent a Room limit increased from £4,250 to £7,500 for the 2016/17 tax year.
The Rent a Room scheme allows owner occupiers and tenants to receive tax-free rental income if they provide furnished accommodation in their main home.
Automatic exemption from rental income occurs if the gross receipts are less than £7,500 or £3,750 per person if the income is shared.
However, if gross receipts are more than £7,500, there are two available options to choose how tax is worked out:
- Pay the tax on the actual profit – total receipts less any expenses and capital allowances.
- Pay tax on the gross receipts over the Rent a Room limit – gross receipts minus £7,500. Expenses or capital allowance cannot be deducted using this method. Tax payment automatically stops if the rental income drops below the limit.
Examples of gross receipts include rental income before expenses, any amounts received for meals, goods and services and any balancing charges.
You can opt in to the scheme at any time if:
- you are a resident landlord, whether or not you own your home
- you run a bed and breakfast or a guest house
You cannot use the scheme for homes converted into separate flats.
In some cases where receipts are significantly less than the limit, it may be better for a landlord to pay tax in the normal way, but HMRC will need to be informed before the 31 January each year.
Link: Rent a Room Guidance