Tax Credits & Rent-a-room Scheme

sazzywoo1

I am considering taking in two lodgers as of April 2016, but am very confused as to how this will affect my tax credits. I am a single parent to two children, aged 12 & 8, and I earn £12000 pa approximately in my 28 hour a week job. I have two spare rooms that I could rent out for about £900 a month for both of them on a room only basis, no food included.

I understand from HMRC that I will need to register for the rent-a-room scheme and any profit exceeding the new threshold of £7500 will be taxed at 20% as I a basic rate taxpayer. So I would pay 20% tax on £3,300 being the difference tween £7500 and £10,800 being the potential maximum income from renting two rooms. I have roughly worked out this will cost me £660 tax per annum = £55 pcm.

What I am completely puzzled about it what tax credits would calculate on. Would it be the £3,300 as this is the profit, or, as I've seen on entitledto, £20 per week of the money I would receive from each sub-tenant is disregarded. So based on that calculation, £900 x 12 = £10800/52 = £207 - £40 = £167 per week is what I would need to declare to Tax Credits. But again, according to entitiledto, this amount would not affect my tax credits in anyway, unless I've got it completely wrong.

The next part is, if I'm doing this from April 2016 would this affect my tax credits from April 2016 or not until April 2017?

Any comments or corrections to my calculations most grateful received. Thank you.

HappyMJ

Don't forget the extra council tax you will have to pay. You will lose the 25% discount for sole occupancy.

Make sure you inform your insurer. Having lodgers increases the premium on both your buildings and contents insurance.

Have you got a gas safety certificate?

You can also figure out your profit by deducting all the expenses you have against the lodgers rent. Such things as mortgage interest, maintenance, gas, electricity, water and council tax can all be deducted reducing your profit. You might find you don't actually have £3,300 of profit.

sazzywoo1

Thank you HappyMJ, ok, hadn't realised that expenses can be deducted. I knew about the council tax, insurance and the gas safety certificate.

So I would be better off going for Method A on the rent-a-room scheme then? What proportion of mortgage interest, maintenance, gas, electricity, water and council tax can be deducted?

Still wondering how this all would affect tax credits.

sazzywoo1

Also, I think I saw somewhere that the tax can be deducted from my PAYE rather than me paying a tax bill, not sure how that would all work?

HappyMJ

sazzywoo1 wrote: »

Thank you HappyMJ, ok, hadn't realised that expenses can be deducted. I knew about the council tax, insurance and the gas safety certificate.

So I would be better off going for Method A on the rent-a-room scheme then? What proportion of mortgage interest, maintenance, gas, electricity, water and council tax can be deducted?

Still wondering how this all would affect tax credits.

You can figure it out however you like.

Dividing all of the household bills by the number of occupants including your children then multiply by the number of paying lodgers is one way. Don't forget to put things like household cleaning products and toilet paper on a separate shopping receipt. You can claim a proportion for them too. If the vacuum cleaner breaks you can claim a proportion of a new one as an expense. There are loads of expenses you can claim for.

Figuring out the bills divided by floor area of the bedrooms and a share of the common areas is another way.

Profits from letting rooms will reduce your tax credits so minimize your profit as much as you can so you don't have any profit.

sazzywoo1 wrote: »

Also, I think I saw somewhere that the tax can be deducted from my PAYE rather than me paying a tax bill, not sure how that would all work?

They (HMRC) can adjust your tax code. That's usually done after you've done your self assessment. In the meantime just save the money.

Darksparkle

Rent a room will only apply if the rooms are furnished.

You'll need to declare your taxable profits to tax credits from your self assessment.

Whether method A or B is best depends entirely on the figures.

http://www.hmrc.gov.uk/Manuals/pimmanual/PIM4030.htm

The expenses would need to be more than £7500 to be worth using method A.

The 10% wear and tear allowance is being removed from April, you'll only be able to deduct the actual costs incurred on replacing furnishings.

From the tax side, read up on the property income manual - http://www.hmrc.gov.uk/Manuals/pimmanual/index.htm

10pence

sazzywoo1 wrote: »

I knew about the council tax, insurance and the gas safety certificate.

So I would be better off going for Method A on the rent-a-room scheme then? What proportion of mortgage interest, maintenance, gas, electricity, water and council tax can be deducted?

You might need to get permission off your mortgage lender - most residential mortgages do not allow lodgers or if they do only one same for insurance. Also, most insurers will not cover the lodgers contents and will not cover any damage caused to your contents by lodgers and/or paying guests.
Before looking at what effects this will have on tax credits and so forth it would be prudent to see if your insurance and mortgage lender will allow these changes.

BigAunty

http://www.landlordzone.co.uk/content/lodgers-and-the-rent-a-room

http://www.landlordzone.co.uk/landlordzone-update/rent-a-room-relief