HMRC has confirmed that the tax-free Personal Allowance can be effectively increased to £20,070 for the 2026-27 tax year through the Rent a Room scheme, a fully legal tax vehicle. This comes as the standard allowance remains frozen at £12,570 until 2031, a decade without inflationary rises.
How the Rent a Room Scheme Works
Under the scheme, homeowners can earn up to £7,500 per year tax-free by renting out a furnished room in their main residence. This amount is added to the standard £12,570 Personal Allowance, meaning the first £20,070 of income is tax-free. Laura Suter, director of personal finance at AJ Bell, 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 Conditions
The scheme applies only to rooms let in the property where the homeowner lives, not to separate flats or buy-to-let properties. The room must be furnished, and the homeowner can rent out as much of the home as they wish, including running a B&B or guest house. Even tenants can benefit if their lease allows subletting. If the income is shared with a joint owner, the allowance is halved to £3,750 per person.
Tax Return Requirements
If earnings from the scheme are £7,500 or less (£625 per month), no tax return is needed. For earnings above that threshold, a self-assessment tax return must be filed, and the tax-free allowance can be claimed on the return. Alternatively, homeowners can opt out of the scheme and report income and expenses on the property pages, which may be beneficial if expenses exceed income.
Impact of Frozen Allowances
The standard Personal Allowance has been frozen at £12,570 since 2021 and will remain so until 2031, causing fiscal drag as wage inflation pushes more people into higher tax bands. The Rent a Room scheme offers a legal way to mitigate this, boosting the effective allowance significantly. HMRC 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 tax exemption is automatic if you earn less than your threshold.”
