HMRC has increased the tax-free personal allowance through the Rent a Room Scheme, allowing individuals to boost their tax-free income to up to £16,320 for the 2026/27 tax year. This is achieved by combining the standard Personal Allowance of £12,570 with up to £7,500 tax-free rental income from letting a furnished room in your main home. The scheme is fully legal and requires submission of a self-assessment tax return if earnings exceed the threshold.
How the Rent a Room Scheme Works
The Rent a Room Scheme lets you earn up to £7,500 per year tax-free from letting out furnished accommodation in your home. If you share the income with a partner, the threshold is halved to £3,750 each, giving each person a total tax-free allowance of £16,320 (£12,570 + £3,750). The exemption is automatic if you earn less than the threshold, but you must complete a tax return if you earn more.
Impact of Fiscal Drag
Chancellor Rachel Reeves extended the freeze on tax thresholds for five more years, meaning the standard Personal Allowance of £12,570 remains frozen until at least 2031. This 'fiscal drag' pushes more people into higher tax bands as wages rise with inflation. The Rent a Room Scheme offers a way to mitigate this by legally increasing your tax-free income.
Eligibility and Requirements
To qualify, you must rent out a room in the property you live in – buy-to-let properties do not qualify. You can let out as much of your home as you want. If you earn £7,500 or less (£625 per month), you are exempt from tax on that income. For shared income, each partner can claim £3,750 tax-free. You can opt out of the scheme and instead report income and expenses normally if it is more beneficial (e.g., if you made a loss).
Official Guidance
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. The threshold is halved to £3,750 if you share the income with someone else." You must complete a tax return if you earn more than your threshold, and you can opt into the scheme to claim the tax-free allowance.
