The tax-free Personal Allowance remains frozen at £12,570 for the 2026-2027 tax year, but a little-known HMRC scheme can legally boost it to £20,070. By renting out a furnished room in your home, you can earn up to £7,500 a year tax-free through the rent-a-room scheme, effectively raising your tax-free income threshold.
How the Rent-a-Room Scheme Works
The scheme allows you to let out furnished accommodation in your main home and earn up to £7,500 per year without paying income tax on that amount. If you share the income with someone else, the threshold is halved to £3,750 each. The relief is automatic if you earn below the threshold, but you must complete a self-assessment tax return if you earn more.
Laura Suter, AJ Bell's director of personal finance, explains: “The government gives a tax break for anyone who rents a room out in their home. Lots of homeowners are looking to do this to generate extra money and try to counteract the rising cost of mortgages. You can make up to £7,500 a year tax-free through rent-a-room relief, which will save you up to £1,500 a year as a basic-rate taxpayer or £3,000 a year if you pay income tax at 40%.”
Eligibility and Key Rules
You must be renting out a room (or multiple rooms) in the home you live in, not a separate flat. The room must be furnished. You can also use the scheme if you run a B&B or guest house in your own home. You don't need to own the property—renters can also benefit, provided their lease allows subletting.
If you own the property jointly and split the income, each person gets only half the relief. You don't have to let the room for a minimum period, but if you earn less than £7,500 a year, you won't need to file a tax return. If you earn more, you must register for self-assessment and declare the income.
Opting Out and Claiming
You can choose to opt out of the scheme and have the income taxed normally, which might be beneficial if you make a loss from renting out a room (for example, after major repairs). The government states: “The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. The threshold is halved to £3,750 if you share the income with someone else. You can let out as much of your home as you want. The tax exemption is automatic if you earn less than your threshold. Which means you do not need to do anything. You must complete a tax return if you earn more than your threshold. You can then opt into the scheme and claim your tax-free allowance. You do this on your tax return. You can choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.”
By combining the £12,570 Personal Allowance with the £7,500 rent-a-room relief, you can earn up to £20,070 tax-free, providing a significant boost for households looking to mitigate the effects of frozen tax thresholds.
