Rent a room for tax-free cash – Moneymagpie reveals how you can!

Jasmine Birtles



1st Jul 2024

Reading Time: 9 minutes

Updated 1st July 2024

You can make up to £7,500 a year in tax free cash if you rent out a spare room. But apart from the tax-free cash incentive, how else could it benefit you?

Let’s examine it in depth:

Airbnb or a similar site.

If you live somewhere where there are a lot of English language colleges, you could rent for a few weeks at a time to foreign students, as you can see here.

 

home insurance comparison page.

The valuation of the contents of the room may include the furniture you have provided with the room. But it may also include the belongings of the tenant. In this case, you will need to wait until you have a tenant before you can fully estimate the value of the room’s contents.

You will, however, be able to discuss with your tenant whether they would rather add their belongings onto your existing insurance policy or create one of their own. If their items are added to yours, don’t forget to add the cost onto their weekly or monthly rent. This makes sure you don’t have to pay for their belongings on your premium. It’s often easier for them to make one of their own.

There is a guide for homeowners on the Association of British Insurers website which outlines what you need to include in your estimation. As well as what most insurers will generally cover.

Make sure you update this list every year when the policy is renewed.

Keep your insurer informed

The second thing you need to do is make sure your insurers are aware of your lodger. Having someone live in your house that you didn’t previously know, and your insurers are not aware of, can invalidate your cover.

This is because should you make a claim for theft, your insurers could challenge it with the fact that you have a stranger living with you.

Gov.uk website here.

You can create your own lodger agreement, or there are a few on the Net that you can use. Here is one, for example, that is useful to copy.

 

How Much Can You Make?

Under the Government’s Rent-a-Room scheme, you can charge up to £7,500 a year or £3,750 each per year if you’re doing it jointly, without paying tax.

Anything over that, and you’ll have to pay tax. But, if you’re living in London or somewhere else expensive, it’s likely that you will make more than that.

The amount you can make each year will vary a lot depending on what sort of room you have and your location.

Living within close proximity to large cities, educational institutes and places of work will allow to charge a little more than other places.

How to get paid

You need to think about whether to ask for rent on a weekly or monthly basis. If you ask for the rent on monthly basis, you will end up gaining slightly less in the long run than if you receive it on a weekly basis.

But there are a few things you’ll need to bear in mind when deciding how much to charge:

• Is the room decorated and furnished to a comfortable standard? Is it worth the money?

• Will the room provide the lodger with a comfortable space? E.g. double bed and room to move.

• Is there space in the bathroom and kitchen for the lodger to keep their own food and belongings?

• Is the property within close proximity to train stations, motorways etc?

You’ll also need to make sure that the amount you charge in rent covers the additional cost of electricity and gas bills and any other utilities, unless you will be charging for those on top.

Generally it’s easier to include them in the overall cost. Just work out how much you use on your own and estimate how much more the other person could use. This way you can charge a bit more and justify it, as well as keeping it simpler.

 

Is Renting a Room for You?

Renting out one of your rooms is not for everyone. There are pros and cons and it depends on you, your lifestyle, your property and how much you need the money, frankly

Pros

Most obviously, this is an easy way of making money without actually doing much work. The money you make can ultimately help towards mortgage costs or any other expenditures.

If you screen potential lodgers properly, you’re likely to end up with someone who will fit into your lifestyle and who you will get along with easily. If you live on your own, a lodger may be excellent company and open up a whole new social life and circle of friends.

It is much easier to remove unsuitable lodgers from your property than it is to remove full tenants, as they do not have the security of tenure. Therefore, should it not work out, and you have outlined details in the contract, it is easy to get them to leave.

Cons

If you like your privacy and can’t bear the idea of sharing your bathroom and kitchen with a stranger, then renting out a room is probably not for you.

Lodgers do have a right to occupy the other rooms in the house and also to invite guests over, at least not without your approval. So if you’re not a people person this might be difficult.

But bear in mind that you could gain a lodger who simply likes to keep themselves to themselves and spends most of their time in their room. Screen potential lodgers properly and everything should be OK.