Tax treatment of rental income (Rent-a-Room Scheme)

A_Fortiori_99

Hi all,

I had a question regarding income from renting out a room in my flat. I am planning to rent out a second room in my flat and understand that under the Rent-a-Room scheme (subject to the criteria) I will not be required to pay tax on the first £7,500 of income received in this way.

My question was - is this actually exempt income, or simply taxed at 0%?

My reason for asking (and in case I've misused/misunderstood the terminology) is that I am currently a basic rate taxpayer but hovering near the higher rate threshold, and additional income of £7,500 would push me over the threshold.

For example, if I earn £45,000 and rent out a room for £8,000 per year, I understand that I would receive the first £7,500 (of lodger income) tax-free and would then be taxed at my marginal rate on the last £500. Would this be 40% (i.e. does the £7,500 count towards my taxable income, even though I do not actually pay tax on it, and therefore push me into the higher rate band), or does only the £500 count (and therefore I remain in the basic rate tax band)?

I am also curious to know as I currently have some savings - so even if I did not rent the room for more than £7,500 (and so did not pay any tax on it), would it count towards myy taxable income and therefore my personal savings allowance would drop from £1,000 to £500 (and I would be taxed at 40% on anything above this)?

Thanks very much!

Dazed_and_C0nfused

A_Fortiori_99 said:

Hi all,

I had a question regarding income from renting out a room in my flat. I am planning to rent out a second room in my flat and understand that under the Rent-a-Room scheme (subject to the criteria) I will not be required to pay tax on the first £7,500 of income received in this way.

My question was - is this actually exempt income, or simply taxed at 0%?

My reason for asking (and in case I've misused/misunderstood the terminology) is that I am currently a basic rate taxpayer but hovering near the higher rate threshold, and additional income of £7,500 would push me over the threshold.

For example, if I earn £45,000 and rent out a room for £8,000 per year, I understand that I would receive the first £7,500 (of lodger income) tax-free and would then be taxed at my marginal rate on the last £500. Would this be 40% (i.e. does the £7,500 count towards my taxable income, even though I do not actually pay tax on it, and therefore push me into the higher rate band), or does only the £500 count (and therefore I remain in the basic rate tax band)?

I am also curious to know as I currently have some savings - so even if I did not rent the room for more than £7,500 (and so did not pay any tax on it), would it count towards myy taxable income and therefore my personal savings allowance would drop from £1,000 to £500 (and I would be taxed at 40% on anything above this)?

Thanks very much!

In your scenario only the £500 would be relevant, the other £7,500 isn't part of your taxable income.

Unlike interest and dividends where any taxable income is counted, even if it's ultimately taxed at 0%.

poseidon1

A_Fortiori_99 said:

Hi all,

I had a question regarding income from renting out a room in my flat. I am planning to rent out a second room in my flat and understand that under the Rent-a-Room scheme (subject to the criteria) I will not be required to pay tax on the first £7,500 of income received in this way.

My question was - is this actually exempt income, or simply taxed at 0%?

My reason for asking (and in case I've misused/misunderstood the terminology) is that I am currently a basic rate taxpayer but hovering near the higher rate threshold, and additional income of £7,500 would push me over the threshold.

For example, if I earn £45,000 and rent out a room for £8,000 per year, I understand that I would receive the first £7,500 (of lodger income) tax-free and would then be taxed at my marginal rate on the last £500. Would this be 40% (i.e. does the £7,500 count towards my taxable income, even though I do not actually pay tax on it, and therefore push me into the higher rate band), or does only the £500 count (and therefore I remain in the basic rate tax band)?

I am also curious to know as I currently have some savings - so even if I did not rent the room for more than £7,500 (and so did not pay any tax on it), would it count towards myy taxable income and therefore my personal savings allowance would drop from £1,000 to £500 (and I would be taxed at 40% on anything above this)?

Thanks very much!

If you have not already done so best to study HMRC guidance ( below) on the two methodology available to calculate and declare your rent a room profit -

https://www.gov.uk/government/publications/rent-a-room-for-traders-hs223-self-assessment-helpsheet/hs223-rent-a-room-scheme-2025

Pay close attention to the examples at point 1.4 since this may assist in how you actually structure your rentaroom agreements ( ie rent plus contribution to expenses) to optimise your declareable profits for the purposes of the relief.