By providing furnished accommodation in your only, or main, home you could earn a tax-free income under the Rent-a-Room Scheme.
The scheme was introduced to encourage people to rent out spare rooms, whether they are homeowners or tenants. The latter must ensure they are entitled to sub-let a room under the terms of their own lease.
For more information, particularly on the possible tax consequences visit the government’s website. Before any rental agreement exists you will want to take an inventory of the room. Property Inventory Software such as that available at https://inventorybase.co.uk/ can help with this process.
You will not be able to use the scheme if the accommodation is not part of your main home or if it is not furnished. You are also excluded if, although it is your UK home, you live abroad. Nor should the room be used as an office or for business. Your lodger can work from the room in the evening or weekends, or for study.
The main attraction for potential landlords is the £7,500 tax-free ceiling, meaning up to that level no tax applies. Gross receipts must include any amounts received for meals and services such as cleaning on top of the basic rental income.
If your gross receipts are above the £7,500 limit (£3,500 if you are joint landlords) it is best to contact the Inland Revenue as there are different ways in which you can pay your tax.
Rules for those running a bed and breakfast and taking advantage of the scheme are different, and again it is advisable to contact HMRC.
Since the tax threshold exists if you earn less than that amount you do not need to do anything if you earn less than £7,500. If you earn more you must complete a tax return if you opt into the scheme, or if you opt out, record your income on the property page of your tax return.
Although lower earners can boost their income through the scheme any income will affect some means-tested benefits such as housing benefit. This will vary depending on whether you are offering prepaid food or not. Universal credit, single person council tax and income support or pension credit may also be affected.
The scheme, by and large, is a way to boost income.