Rent a Room scheme: what is it and how does it work?

With the cost of living crisis continuing, many households need to find a little extra cash to meet their monthly outgoings – especially mortgage payments.

If you’re a homeowner, you could make use of the government's Rent a Room scheme and earn some tax-free cash.

Here’s the breakdown of what the Rent a Room scheme is and how it works.

Why are mortgage payments so high? 

Interest rates started going up in 2021 as the Bank of England tried to curb inflation by raising the base rate. Inflation peaked at 11.1% in October 2022. Interest rates rose from just 0.1% during the COVID pandemic in 2020 to 5.25% in August 2023.  

They have since come down to under 4%, and inflation is back down to just over 3%. However, many people’s mortgage payments remain higher than they were in previous years. 

As such, some mortgage experts are concerned that some homeowners on long-term fixed rates may see their payments rise when their fixed-rate deal ends. 

High interest rates mean that the cost of lending money is higher. As a result, this can make it harder for households to keep up with their monthly repayments.  

What is the Rent a Room scheme?  

With households needing to find a little more cash at the end of every month, many people need a way of earning extra. Renting out a room is one way you could do this.  

The Rent a Room scheme is a government relief scheme that lets people rent out a room in their house, with the first £7,500 of rent payments tax-free.

If the rental income is being shared between two people, only the first £3,750 per person is tax-free.    

How does the Rent a Room scheme work? 

Whether you own your home or just rent, you could choose to rent out a room in your house so as to earn £7,500 worth of tax-free income.

This tax exemption applies automatically, so if you earn less than this, you don’t need to do anything.

If you earn more, however, you need to complete a self-assessment tax return to declare your earnings.

It is also possible to opt out of this particular scheme and pay your taxes on your rental income differently.  

Who is eligible to take part in the rent a room scheme? 

You don’t have to be a homeowner to take part in the scheme.

Whether you own a property or are a tenant, you can take part in this scheme if the room being rented out is fully furnished.

If you are a tenant, you need permission from your landlord. For landlords, it’s important to have permission from the property’s insurer.  

What are the tax benefits of the Rent a Room scheme? 

The first £7,500 of your income under the Rent a Room scheme is tax-free.

If you earn more than this, you need to fill out a tax return and pay any outstanding tax. However, when filling out your self-assessment, you have the choice of how to pay your tax.  

There are two ways to tax property income. The first is to pay tax on your income in the same way as a rental business by paying tax on your actual profit after deducting expenses.

Or you can choose to take £7,500 tax-free, before paying taxes on excess rent beyond this.  

In practice, this means that if you choose the first option, you only pay tax on any profits you have made and after you have claimed any expenses back.

With this option, you don’t keep your £7,500 tax allowance. With the first option, you keep any annual rent that falls within this £7,500 allowance, with any additional income being charged at your top rate of tax.  

When it comes to choosing how you pay taxes on your rental income, you need to do the calculations to figure out which option is right for you.

There’s no obligation to stay in the Rent a Room scheme, so if you find that it is better for you to pay your tax in a different way, you can change this easily and quickly.  

What changes are upcoming for property taxes?

It is also worth being aware of recent changes to property taxes announced in the 2025 Autumn Budget. 

A new ‘mansion tax’ (the high value council tax surcharge) is being introduced by the government, which is a new tax on properties worth more than £2 million. 

The charges are expected to cost homeowners between £2,500 to £7,500 per year (the latter is for properties worth more than £5 million) and will be paid alongside council tax.

The fees will be based on new property valuations to be issued by the Valuation Office Agency for 2026 rather than when the properties were purchased. 

In addition, the government is introducing a higher landlord income tax. This is a 2% increase in income tax on rental income for landlords.

The basic, higher and additional income tax rates for landlords will rise to 22%, 42%, and 47% respectively, from April 2027. 

Chancellor, Rachel Reeves, says this is to make the tax system ‘fairer’ and to compensate for landlords not paying national insurance on their earnings.

Does rent a room apply to Airbnb properties? 

The Rent a Room scheme covers short-term rentals, and includes any rentals offered through Airbnb.

For people renting properties through Airbnb, an alternative tax allowance is on offer.

You can claim a tax allowance of up to £1,000 each tax year if you are renting through Airbnb, but this allowance can’t be used at the same time as the Rent a Room scheme, so it may not be the right option for you.  

If your expenses are more than your income, it may make more sense to claim expenses instead of the allowances.  

How does the Rent a Room scheme affect your benefits? 

If you are receiving housing benefit, the Rent a Room scheme affects your benefits differently depending on whether your lodger is a boarder or a sub-tenant.

If you are providing a room and prepared food, your renter is classed as a boarder. The first £20 of rental income a week is disregarded, along with half of the remaining rent you receive.  

If you are only providing a room, your renter is classified as a sub-tenant. In this case, the first £20 is disregarded, and the rest is seen as income, which could affect your housing benefit.

If you are receiving universal credit, your Rent a Room income of up to £7,500 isn’t classed as income and doesn’t impact your universal credit payments.

Also, if you were previously living alone and received the 25% single-person council tax reduction and decided to rent out a room, you’ll no longer qualify for it.

Seek mortgage and property advice

The rising cost of living is a challenge for everyone, but there are ways for you to keep ahead of rising costs.

Speak to a financial adviser or mortgage adviser today and start protecting your savings today. Find an adviser on Unbiased.