Find out how much you should charge your lodger when letting a room and earn an extra £7,500 a year tax free with this handy guide from badi.
Did you know that you can earn up to £7,500 tax free just by letting out your spare room? Thanks to the Rent a Room scheme, it’s now more beneficial than ever to get a lodger. Not only will you make more money, you’ll get to meet new people, too. Keep reading our handy guide if you’re not sure how much you should charge a lodger or need some more information on how to make the money.
Start by checking out how much landlords near you are charging and compare your property to their listings. Try to find a property that includes similar features as yours to help you decide on a fair price as well as seeing what rooms are available in your local community. Your area affects property price, as does the size of the room and the condition of it.
Consider the added extras you’ll be offering and if they’re worthy of charging more for. Extras may include meals, proving a laundry service or supplying new towels. Don’t forget to discuss this with your potential lodger and include it in the description so people know exactly what they’re paying for.
You’ll need to decide if you want to include bills in the overall rent price and if you want to receive weekly or monthly payments. You can charge an amount just for the room and communal areas while asking for payments when the bills come in every month so these costs are covered. It’s important to have an estimated figure on hand so the lodger will know whether they can afford the bills and get an insight into the total figure they’ll pay.
Another option to consider is charging an inclusive price that covers both rent and bills. This is good for those who are already on a fixed rate for their water and electric bills or for people who would rather get the same lump sum every month.
How much can I earn from letting out a room?
The Rent a Room scheme allows you to earn up to £7,500 a year tax free. This amount is calculated by your gross receipts at the end of the tax year.
Gross receipts include:
- The rental income before expenses.
- Anything you receive for meals and services such as cleaning.
- Balancing charges.
- Bills are included in the gross receipt amount regardless of whether they are inclusive in the rent or not.
If your gross receipts are less than £7,500 or £3,750 you’ll be automatically exempt from being taxed on the profit you have made.
If your receipts are more than this amount, you have two options:
- You can pay tax on your profit, which is your total income received minus allowable expenses.
- Pay tax on the gross income with no allowance for expenses but minusing the tax-free threshold of £7,500 or £3,750.
The easiest way to decide is to calculate what your total expenses are. If you find they’re larger than the tax-free threshold, then you should stick with the first option. Go for option two if they’re smaller. Make sure you call HMRC if you want to choose the last option, or they’ll automatically take tax from your profit.