The Number Everyone Quotes, and the Number That Decides It
Search for the Rent a Room Scheme and you will get the same sentence back about twenty times. You can earn £7,500 a year tax free from letting furnished accommodation in your own home.
That sentence is correct. It is also the least useful part of the rule, because it tells you nothing about how the £7,500 is measured, what happens when you go one pound over, or what taking a lodger costs you in places that have nothing to do with income tax.
The Rent a Room Scheme has been running since 1992. It is one of the simplest reliefs in the UK tax system and one of the most frequently misunderstood, mostly because the test it applies is not the one people assume. Here is how it actually works, and where it stops being a good deal.
Gross Receipts, Not Profit
The £7,500 is measured against your gross receipts. Not your profit. Not the rent after you have taken off a share of the gas bill. The whole amount you receive, before a single cost comes off.
It is wider than the rent, too. HMRC's own helpsheet includes in gross receipts any amounts you receive for meals, goods and services such as cleaning or laundry, plus any balancing charges. So if you charge a lodger £600 a month for the room and another £50 a month because you do their washing and feed them on weeknights, your gross receipts are £7,800, not £7,200. You are over the threshold.
This is the single most common error we see. Someone runs the numbers on what they think they are clearing after bills, decides they are comfortably under, and never looks at it again. The test was never about what they cleared.
The threshold halves to £3,750 if anyone else receives income from letting the same property. A couple who jointly own the house and split the lodger's rent get £3,750 each, not £7,500 each. The total relief across the property is the same £7,500 either way.
When the Scheme Applies, and When It Does Not
The accommodation has to be furnished, and it has to be in your only or main residence at the time you let it. That is the whole qualifying test, and it is worth being precise about the edges:
- It works for tenants, not just owners. If you rent your home and your landlord permits it, you can take in a lodger and claim the relief. This surprises people.
- It does not work once you move out. Letting your old flat after moving in with a partner is a normal property business, not Rent a Room, even if you left the furniture.
- It does not work for unfurnished space.
- It does not cover space let for business use, so renting a spare room to someone as an office is outside the scheme. HMRC allows for the fact that a lodger may do some work from the room in the evenings and at weekends.
- It does not work if you are living abroad and letting your UK property.
- It does cover short term lets in your own home. Airbnb in the spare room qualifies on the same basis as a lodger.
That last point nearly changed. In 2018 the government consulted on adding a shared occupancy test, which would have required you to be physically present for at least part of each letting. It was aimed squarely at whole-home holiday lets dressed up as spare rooms. After consultation the legislation was dropped from Finance Bill 2018-19, with the Treasury saying it wanted to maintain the simplicity of the system.
We would not treat that as settled. The government has already drafted the restriction once. If Rent a Room ever comes up in a Budget again, that is the shape the change is most likely to take.
The Three Positions You Can Be In
Everything about this relief comes down to which of three situations you are in.
1. Gross receipts of £7,500 or less
The exemption is automatic. There is nothing to claim, nothing to elect, nothing to file. If you are not otherwise in Self Assessment, a lodger paying you £550 a month does not put you there.
This is genuinely the simplest corner of UK tax, and it is the reason the relief is popular.
2. Gross receipts over £7,500, default treatment
Once you are over the threshold, HMRC's default is what the helpsheet calls Method A: you are taxed on your actual profit, which means declaring the full receipts and deducting a fair share of your real costs, plus capital allowances where they apply. This is ordinary property income treatment and Rent a Room does not feature at all.
3. Gross receipts over £7,500, alternative basis elected
Method B is the alternative basis. You are taxed on your gross receipts less £7,500, with no deduction for expenses whatsoever. Receipts of £9,200 give you £1,700 of taxable income and that is the end of the calculation.
Method A is the default. Method B has to be elected. That is the wrong way round for most people's intuition, and it matters because of the deadline.
The Election Deadline Almost Nobody Meets
You have to make the election within one year of the 31 January following the end of the tax year. For the 2025/26 tax year that is 31 January 2028. For 2026/27 it is 31 January 2029.
Two things follow from that, and they pull in opposite directions.
The generous reading is that you have about twenty two months, which is a long time to change your mind. If you filed on the default basis and later realised Method B was cheaper, you can usually still fix it.
The unforgiving reading is that the window does close, permanently. We have seen people work out three years later that they should have elected, and by then two of those years are gone.
There is also an election in the other direction. If your receipts are under £7,500 but you actually made a loss, perhaps because you spent heavily on furnishing the room, you can elect out of the automatic exemption so that the loss exists and can be carried forward against future property profits. Same deadline. Almost nobody does this, and in a first year with real spending it is occasionally worth several hundred pounds.
Which Method Wins
There is a shortcut that holds up well in practice. Method B wins whenever your allowable costs are less than £7,500. Method A wins when they are more.
That sounds obvious and it is, but the reason it matters is that most people badly underestimate their allowable share of household costs, because the apportionment is not intuitive. Under Method A you can deduct a fair proportion of the costs of running the whole house, which for a lodger with their own bedroom and shared use of everything else can be a meaningful slice of the mortgage interest, insurance, utilities, council tax and repairs.
Two cautions before you assume Method A is better:
Mortgage interest does not work the way it used to. Under Method A you are running a property business, so the apportioned mortgage interest is caught by the Section 24 finance cost restriction. It is not a deduction from profit. It becomes a basic rate tax credit instead, which is worth much less if you are a higher rate taxpayer. We cover the mechanics in our guide to tax on rental income.
Method A means real record keeping. Receipts, apportionment calculations, a defensible basis for the split. Method B needs one number. For a saving of fifty pounds, that is a bad trade.
What Nobody Prices In: The Council Tax Discount
Here is the part the "£7,500 tax free" headlines never mention.
If you live alone, you get a 25 percent single person discount on your council tax. Take in a lodger and, in almost all cases, you lose it. The main exception is where the lodger is disregarded for council tax purposes, which most commonly means a full time student.
The average Band D bill in England for 2026/27 is £2,392. A 25 percent discount on that is £598 a year. So a homeowner charging a lodger £500 a month is not receiving £6,000 tax free. They are receiving £6,000 and then handing back £598 to the council, which is an effective rate of just under 10 percent on income that everyone including HMRC describes as tax free.
That is not a criticism of the relief. It is a criticism of how the relief is explained. There is a whole industry of content telling people about £7,500 of tax free income and essentially none of it mentions that the first few hundred pounds go straight to the local authority. If you are deciding whether a lodger is worth it, that number belongs in the calculation.
The same applies to two costs that are easier to forget than council tax:
- Your mortgage lender. Most mortgage contracts require the lender's permission before you let out part of the property. Permission is usually given without fuss, but it needs asking for.
- Your home insurance. Tell your insurer. Premiums may rise slightly. If you do not tell them, the policy may not be valid, which is a considerably more expensive outcome than a higher premium.
Benefits: The Same Lodger, Two Completely Different Answers
If you claim benefits, the treatment of lodger income depends entirely on which benefit you are on, and the gap is startling.
Universal Credit ignores lodger rent completely. It is not treated as income, so charging a lodger £600 a month does not reduce your award by a penny.
Housing Benefit disregards only £20 a week. Everything above that counts as income and reduces the award.
Same house, same lodger, same rent, wildly different outcome. For anyone on Universal Credit with a spare room, this is one of the few genuinely uncapped ways to increase household income, and it is not well known.
One important caveat. If you are a working age social housing tenant, the spare room still counts as a spare room for the under-occupancy rules, so the 14 percent reduction for one extra bedroom continues to apply while the lodger is there. The rent is disregarded. The bedroom reduction is not.
We are accountants rather than benefits advisers, so if this is your situation, take advice from someone who does benefits properly before making a decision. But it is worth knowing the question exists.
Capital Gains Tax: One Lodger Is Fine, A Lodging House Is Not
People worry that taking a lodger will cost them Private Residence Relief when they sell. For a single lodger, it does not.
HMRC's Capital Gains Manual at CG64702 sets out the position from Statement of Practice 14/80. Where a lodger lives as a member of the owner's family, sharing living accommodation and taking meals with them, no part of the property is treated as having ceased to be the owner's main residence. No restriction of relief.
The manual is explicit that officers should not consider any restriction where there is a single lodger, but should consider it where there is more than one. The line HMRC is drawing is between taking someone in and running a lodging house as a business.
There is a second point worth knowing. Letting relief was heavily cut from 6 April 2020 and now only applies where the owner is in shared occupancy with the tenant. Having a lodger while you live there is the textbook case that still qualifies. Moving out and letting the whole house does not. So the lodger arrangement is one of the few situations where letting relief survives at all, which is a small compensation for a relief that was gutted.
Our full guide to capital gains tax covers rates and the annual exempt amount.
Making Tax Digital, and a Genuine Reason to Elect
Making Tax Digital for Income Tax arrives on a staggered basis: from April 2026 for qualifying income over £50,000, April 2027 over £30,000, and April 2028 over £20,000. Qualifying income is gross, before expenses, and GOV.UK works it out from the tax return you submitted for the previous year.
That last phrase does a lot of work here. If your lodger receipts are fully covered by the automatic exemption, they never appear on your return, so they cannot form part of qualifying income. If you are over the threshold and taxed on the default basis, the full gross receipts are property income on your return and they count.
For someone with, say, £14,000 of self-employment turnover and £9,000 of lodger receipts, that is the difference between £14,000 and £23,000 of qualifying income, and therefore the difference between being in Making Tax Digital from April 2028 and not being in it at all. The £20,000 threshold makes this a live question for a surprising number of people.
We would be careful about treating this as a settled planning strategy, because HMRC's published guidance on qualifying income does not address the reliefs directly and the detail may be clarified before April 2028. But it is worth asking about rather than discovering. Our guide to Making Tax Digital has the full timetable.
The April 2027 Change That Applies Here Too
From 6 April 2027 property income gets its own set of rates: 22, 42 and 47 percent, two points above the equivalent income tax rates. Taxable income under Rent a Room is property income, so the excess above £7,500 goes into that box along with everything else.
In cash terms it is small. A basic rate taxpayer with £9,500 of receipts on the alternative basis pays £400 today and £440 from 2027/28. Forty pounds.
The point is not the forty pounds. It is that this income now sits in a rate box that can be moved without anyone touching headline income tax rates, and it has already been moved once. If you are making a five year decision about letting a room, assume the gap widens rather than closes.
Four Worked Examples
The straightforward one. A room let at £520 a month, £6,240 for the year, no meals or laundry charged. Under the threshold, exemption automatic, nothing to file, no election, no records required beyond common sense. This is most people, and it is genuinely simple. Net of the lost council tax discount of around £598, the real gain is about £5,640.
The average room in Britain. SpareRoom put the average UK room rent at £748 a month in mid-2025, which is £8,976 a year. That is £1,476 over the threshold. Elect for the alternative basis and the tax at basic rate is £295. The significant part is not the £295. It is that a person charging the national average rent for a spare room now has to file a tax return, and the relief was originally set at a level intended to cover exactly this person.
The case for Method A. A homeowner with no mortgage lets two rooms in a large house for £14,400 between them. Their fair share of running costs across the let space comes to £8,900. Method A gives a taxable profit of £5,500 and tax at basic rate of £1,100. The alternative basis would give £6,900 taxable and £1,380 of tax. Method A wins by £280, and the price of winning is keeping proper records and apportioning honestly. Worth it here. Not worth it for a £40 difference.
The first year loss. Someone furnishes a room properly before letting it: bed, wardrobe, desk, redecoration, £3,100 in total. The lodger moves in for the last three months of the tax year and pays £1,800. Receipts are under £7,500, so the exemption applies automatically and the £1,300 loss simply vanishes. Elect out of the scheme by 31 January two years later and the loss exists, carried forward against the next year's lodger profits. That election is worth £260 at basic rate and costs nothing but remembering.
Our Honest View
The freeze is doing all the policy work, quietly. The £7,500 threshold was set from 6 April 2016 to restore the relief's 1997 value after nineteen years at £4,250. It has not moved since. Uprated with inflation it would now be somewhere close to £11,600. Meanwhile the average room in the UK rents for £8,976 a year. A relief designed to cover a typical room no longer covers a typical room, and the number has not been debated once in the ten years it has been standing still.
That freeze has a housing cost as well as a tax cost. SpareRoom's July 2025 survey of people who had stopped or considered letting a room found 40 percent cited going over the tax free limit and having to complete a tax return. Not the tax itself. The return. Whatever you think the right threshold is, a policy that removes rooms from the rental market because people do not want to file a form is not the policy anyone intended.
Do not let the tax tail wag the dog by charging under the line. We see people cap a lodger's rent at £625 a month specifically to stay under £7,500 when the market rate is £750. That decision costs them £1,500 of rent to avoid £295 of tax. The arithmetic is not close. Charge what the room is worth and file the return.
Take the simple route when it is genuinely simple. The alternative basis exists so that a person letting one room does not need a filing cabinet. If your receipts are over the line by a modest amount and your real costs are nowhere near £7,500, elect for it, pay the small amount of tax, and stop thinking about it. Precision has a price and it is not always worth paying.
The two decisions worth actually thinking about are the loss year and the election deadline. Everything else here is arithmetic that resolves itself. Those two are one-way doors.
How IAK Can Help
We act for landlords across North London and Hertfordshire, and a fair share of them are not landlords in any way they would recognise. They have a spare room, a lodger, and a nagging sense that they should probably check whether it is a problem.
Usually it is not, and we will tell you that in one conversation. Where it is worth doing properly, that means running Method A against the alternative basis on your actual numbers, making the election in time, catching a first year loss before it disappears, and making sure a lodger does not quietly drag you into Making Tax Digital or a payment on account you were not expecting.
If you have a lodger and have never declared anything, that is a common and generally fixable conversation, and it costs far less to start it than to be asked about it. Get in touch, or read about our personal tax and tax planning work.
Sources
- Rent a room in your home: The Rent a Room Scheme, GOV.UK, for the £7,500 threshold, the £3,750 shared threshold and the automatic nature of the exemption below the limit.
- HS223 Rent a Room Scheme (2026), GOV.UK, for gross receipts including meals, goods and services and balancing charges, Method A as the default, the alternative basis, the one year after 31 January election deadline, the election out to create a loss, and the circumstances in which the scheme cannot be used.
- The Income Tax (Limit for Rent-a-Room Relief) Order 2015, legislation.gov.uk, for the increase from £4,250 to £7,500 with effect from 6 April 2016 and the stated aim of restoring the relief to its 1997 real value.
- Budget 2018: shared occupancy test for rent-a-room relief rejected, Accountancy Daily, for the withdrawal of the shared occupancy test from Finance Bill 2018-19.
- CG64702: private residence relief, letting, lodger, HMRC Capital Gains Manual, for Statement of Practice 14/80, the single lodger position and the distinction drawn with running a lodging house.
- Capital Gains Tax: Private Residence Relief, changes to the ancillary reliefs, HM Treasury, for the restriction of lettings relief to shared occupancy from 6 April 2020.
- Taking in a lodger: what you need to think about first, Citizens Advice, for the loss of the 25 percent single person council tax discount, the Universal Credit treatment of lodger rent, the £20 a week Housing Benefit disregard, and the mortgage and insurance points.
- Work out your qualifying income for Making Tax Digital for Income Tax, GOV.UK, for qualifying income being gross self-employment and property income taken from the previous year's tax return.
- It's time to raise the rent a room scheme threshold, SpareRoom, for the £748 average monthly UK room rent, the inflation-adjusted threshold of around £11,600, the 16 towns and cities above the threshold, and the July 2025 survey finding that 40 percent of respondents stopped letting a room because of the tax free limit and the tax return.