The Rent a Room scheme allows homeowners to earn up to £7,500 a year tax-free, which on top of the standard £12,570 Personal Allowance gives a total tax-free income of £20,070 for the 2026-27 tax year.
The standard income tax Personal Allowance has been frozen at £12,570 since 2021, and the Government has extended the freeze to 2031, meaning no rises to keep pace with inflation. This has dragged more workers into higher tax bands as wages rise, a phenomenon known as "fiscal drag".
How the Rent a Room scheme works
Renting out a furnished room in your home lets you earn up to £7,500 before the earnings become taxable. The allowance applies only to rooms let in the property you live in, so it cannot be used for buy-to-let income.
Laura Suter, AJ Bell's director of personal finance, said: "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 tax return rules
Ms Suter added: "You must be renting out a room (or multiple rooms) in your home, rather than a separate flat, and the room must be furnished. But it’s not limited to a room, you can rent out as much of your home as you like. You can also use it if you run a B&B or guest house, so long as it’s in the same property you live in. You don’t even need to own the home to benefit, you could be renting out part of your rental property – however, you’ll need to check that your lease doesn’t prohibit that."
She continued: "You don’t have to let the room for a minimum period of time. But be aware that if you own the property jointly with someone and split the income you only get half the relief per person. If you earn less than £7,500 a year from renting out a room you won’t need to fill in a tax return, but if you earn more than the tax-free limit you will."
Declaring income and opting out
If you earn £7,500 or less from renting out a room (£625 per month), you are exempt from paying tax on that income. You must declare it to HMRC as part of a self-assessment tax return. The exemption is automatic if you earn less than the threshold, so you do not need to do anything.
You can opt out of the scheme and have the income taxed normally, which might work out if you made a loss from the letting and want to offset it against tax on another buy-to-let property. The Government explains: "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."
