The tax-free Personal Allowance remains frozen at £12,570, but UK residents who rent out a room can boost their total tax-free income to £20,070 for the tax year by using HMRC's rent-a-room scheme, which provides an additional £7,500 tax-free allowance.
The Personal Allowance has been frozen by the Government since 2021, and this freeze is now set to extend until 2031, marking a full decade without increases to keep pace with inflation. As a result, more people are being pushed into higher tax brackets as wages rise, a phenomenon known as "fiscal drag."
How the Rent-a-Room Scheme Works
The scheme allows individuals to earn up to £7,500 per year tax-free from letting out furnished accommodation in their home. If the income is shared with someone else, the threshold is halved to £3,750. The tax exemption is automatic for those earning less than the threshold, meaning no action is required.
Taxpayers who earn more than the threshold must complete a tax return and can then opt into the scheme to claim the tax-free allowance. Alternatively, they can choose not to opt in and instead record their income and expenses on the property pages of their tax return.
Opting Out and Claiming Losses
There is also the option to opt out of the scheme and have rent-a-room income taxed in the usual way. This could be beneficial if a loss was incurred from the venture, such as after significant damage requiring refurbishment, allowing the loss to be offset against tax liability on another buy-to-let property.
According to the government, "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." Individuals can let out as much of their home as they want, and the exemption is automatic if earnings stay below the threshold.
For those earning above the threshold, the government advises: "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."
