A MONEY expert has revealed how you can earn an extra £7,500 a year – and there’s ZERO tax to pay.
It could be a welcome cash boost as tax-free as mortgage bills are soaring for thousands of households.
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The bank boost comes via the Rent a Room scheme, set up by the Government.
Homeowners, as well as renters who are allowed to sublet, can rent out a spare room to a lodger and earn up to £7,500 a year before having to pay income tax on the extra cash.
It means you can boost your bank balance by thousands of pounds without fearing an unexpected tax bill.
It comes as millions of homeowners face a huge jump in their mortgage repayments when their fixed rate deal ends.
The extra money could come in useful, especially after mortgage rates hit a 15-year high, surging over 6.6%.
The Bank of England (BoE) has been hiking the base rate for more than 18 months, taking it from 0.1% in December 2021 to 5%.
The measure is intended to slow inflation, which was 8.7% in May, but also has a negative knock-on effect on mortgage rates.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said taking up the Rent a Room scheme could be a great way to make some extra money amid the recent turmoil.
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“For anyone with a child leaving school and going to study elsewhere, there’s a great opportunity to rent their room out, and use it to support them over the next few expensive years,” she explained.
“If you don’t want to rent the room full time you could consider anything from short-term lets to renting to a student during term-time, or to a commuter from Monday-Friday.”
How the Rent a Room scheme works
Under the Rent a Room scheme, the first £7,500 a year you receive from renting out a furnished room to a lodger is tax-free.
The scheme applies to anyone who is a resident landlord, whether you own the property or not.
This means you can use the scheme if you are renting.
You can also get the tax boost if you run a bed and breakfast, guest house or are on Airbnb.
But there are some rules to bear in mind about the scheme.
First, if you still have a mortgage on a property, you need to get permission from your lender before renting out a room.
If you’re renting, you’ll need to get the all clear from your landlord.
In either situation, you will need to tell your home insurance provider as it could impact what you pay for your policy.
Second, if you’re living on your own and claiming the 25% council tax discount for a single person you can’t apply for the scheme.
Third, any income received from renting a room can impact any means-tested benefits like Pension Credit or if you’re a social housing tenant how much housing benefit you receive.
And lastly, if you own a property with someone else, you only get half the £7,500 allowance – so £3,750.
It’s worth noting, if you are on Universal Credit any money you receive from renting a room up to £7,500 it is not classed as income.
Whether you’re renting or have a mortgage, you should keep a monthly record of any income earned from letting out a room.
This will be useful if you breach the £7,500 threshold at any stage.
Do I have to apply for the scheme?
If you earn under the £7,500 threshold through renting, you don’t have to do anything as none of it is taxable.
But, if you do breach it, you will have to complete a self-assessment tax return via the Government’s website.
There are two options available to you.
You can either pay the tax on any profits after deducting heating, lighting and any repairs from the amount you’ve made.
Or, you can opt into the Rent a Room scheme through the tax return and then pay tax on just the rental income over the £7,500 figure.
Sarah said if the cost of providing the room is less than £7,500, opting into the Rent a Room scheme was the best approach.
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