How to make an extra £7,500 tax free income next year
If you own your home then there's a good chance you have a spare room but are you taking advantage of a considerable tax break that it brings you?
Four in 10 households have two or more bedrooms spare; we have two and now that our house renovation is nearing completion, we are thinking of renting them out next year under the government's rent-a-room rules.
It's a generous tax break as it stands; you can receive £4,250 a year in rental income from lodgers in your home tax free, and from April next year it will be even more generous as the allowance is being increased to £7,500.
The allowance is per house, not per person so a couple renting out a room in their home has to split the allowance.
If you have lots of lodgers or happen to live in an area that can command high rents, you may tip over the £7,500 allowance and if you do you have to declare the extra income to the taxman through a self-assessment form at the end of the tax year. You will then pay income tax – again a couple can split this extra income between them and both declare it via self-assessment forms.
If you don't fancy living with another person full-time you can still make use of the allowance by renting your property out through sites like Airbnb.
Keep in mind that if you do want to rent a room out to tourists you will still have to pay tax. While Airbnb landlords have, so far, flown under the radar of the taxman they are increasingly likely to be targeted.
Irish tax officials have already told Airbnb it has to hand over details of Irish members so it can have a look at whether they owe tax and it is increasingly expected that HMRC will do the same.
But don't be put off, if your rental earnings are below the £7,500 from April next year you don't have to declare anything.
Personally I think it's a fantastic tax break and the fact that it will reach £7,500 next year means that even more people will be able to benefit from extra income. When we have a housing shortage in the UK and people scrambling to rent rooms, offering people the incentive to open up their homes can go a long way to addressing the problem.
Read more:
A third of today's 35-year-olds will be renting in retirement
Retirees make £100k by renting out a spare room
How much could you make from renting your house out?
