02-08-2025
The landlord tax trap stopping home owners renting out their spare rooms
Homeowners looking to earn some extra cash from renting out a room to a lodger are being snared by a tax trap.
Households can let out a furnished room and earn up to £7,500 a year tax-free without notifying the tax office. But the allowance hasn't risen in nine years, despite rental prices shooting up in that time as the cost of living has risen.
Housing expert Matt Hutchinson, director of house share site SpareRoom, says the freeze on the Rent a Room Scheme's tax-free threshold is putting off would-be landlords.
He says that if just one in 20 of Britain's spare rooms were rented out to lodgers, it would add the equivalent of a city the size of Birmingham to the nation's housing stock.
Mr Hutchinson says that if the threshold had risen in line with RPI inflation – which includes costs associated with home ownership – it would now be £11,500 and cover 94 per cent of UK postcode areas. He also thinks a higher threshold would mean more rooms coming on to the market.
Among those worst affected by the freeze are homeowners for whom lodgers are a useful source of extra income, as the cost of living and mortgage rate rises have added substantially to bills.
Alex Hobbs, 29, a manager in the construction industry, took in a lodger when he was looking for a way to help cover his mortgage on a two-bedroom flat in London after the pandemic lockdown.
But the tax threshold – and the cost of getting an accountant to check he was correctly declaring his income – has now put him off.
He says: 'The cost of living had hit all my different household bills. Interest rates had gone up on residential mortgages, so I was giving myself that security and peace of mind that I wouldn't be stretched too thin.
'So I decided it would be sensible to rent out a spare room. He [the lodger] was quite sociable, so we became friendly, and it was quite nice because it gave me a bit of company sometimes.'
Mr Hobbs says that renting out a room covered half his mortgage payments, and the tax-free allowance, which works out at £625 per month, was a major benefit.
'I was charging £750 a month and then he paid separately for a share of the bills. Then I realised you had to pay tax on rent over £625 a month.
'I thought the allowance was quite low. I had to get an accountant and pay their fees, and it was a lot of work. I know that other tax allowances have been frozen too, but the personal income tax allowance has at least changed in the last ten years, and the lodger allowance hasn't.'
Mr Hobbs has now moved further out of London and into a one-bedroom home, so he no longer has a spare room to rent.
However, he says he would have considered buying a bigger property and relying on one or two lodgers if it hadn't meant completing a tax return each year.
The Rent a Room scheme is open to households who let a furnished room in their main home to a lodger. Even tenants can make use of it, although many leases can forbid sub-letting and require special permission from the landlord.
Mr Hutchinson campaigned for the threshold to be lifted from £4,250, or £354 a month, to the higher rate in 2016. At this point £7,500 covered average room rents everywhere except London.
But data from SpareRoom shows average room rents have increased by 21 per cent across the UK, and by 34 per cent in London over the past nine years.
Mr Hutchinson says: 'It's not just the money – people can be really scared about tax and adding complexity to their finances.
'If you look at Office for National Statistics data and the number of houses in England and Wales with one or two spare rooms, there's about 26 million. So even renting out 5 per cent of those rooms would create a city the size of Birmingham but spread out across the country.'
Frozen income tax thresholds mean the bill for breaching the allowance can be larger if someone has been dragged into a higher tax bracket by the extra income.
Laura Suter, director of personal finance at the investment platform AJ Bell, says: 'It means that, for some, once this tax and other costs of renting a room are taken into account, there isn't sufficient incentive for them to do it.'
The question of hiking the tax-free allowance has been raised in Parliament, most recently in February when Baroness Watkins of Tavistock asked if the Government had considered raising it.
Replying on behalf of the Treasury, Labour peer Lord Livermore agreed the scheme 'reduces and simplifies the tax and administration burden for those affected and has taken some taxpayers out of self-assessment entirely'.
However, he added a rise was not on the cards, saying: 'At present, the Government believes that the Rent a Room Scheme threshold is set at an appropriate level.'
