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Tax implications of letting a room in your home

September 5, 2025

As the cost of living rises, you may consider letting a room in your home to bring in some much-needed additional income. This can be tax efficient as the Rent a Room scheme allows an individual to earn £7,500 a year from letting furnished accommodation in their own home (which can be owner-occupied or rented). Where more than one person benefits from the rental income, each can earn £3,750 a year tax-free, regardless of the number of people who benefit (so the total tax-free rental income can exceed £7,500 where three or more people share the rent).

To take advantage of the scheme, the room must be furnished.

If the rental income received is less than your tax-free threshold, you do not need to report the income to HMRC. However, if the rental income exceeds your tax-free threshold, you will need to complete a tax return.

Where the income exceeds the tax-free threshold, you can work out your taxable profit in one of two ways. If you want to take advantage of the scheme, you can deduct your tax-free allowance rather than your actual costs. This will often be beneficial. For example, if you receive rental income from letting furnished accommodation in your own home of £8,000 and incur costs of £700, under the Rent a Room scheme, your taxable profit will be £500 (£8,000 – £7,500) rather than £7,300 (£8,000 – £700). If you want to calculate your profit in this way, you will need to opt into the scheme in your tax return.

The scheme will not be beneficial if your actual costs are more than the tax-free limit. Here it is better not to use the scheme and deduct your actual costs rather than the threshold.

If your income is below the threshold but you have made a loss, it may be preferable to complete a tax return to preserve that loss rather than taking advantage of the scheme.

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