The Government’s Rent-a-Room Scheme: an Alternative to Equity Release
If you’ve recently retired, or will be entering retirement soon, then you might be looking for ways to top up your pension.
Whilst the state pension does help a lot, for a lot of people who are relying on it solely it simply is not enough, especially considering the rise in the cost of living ever since the 2019 Covid-19 Pandemic.
In order to supplement their pension and income, a lot of people use equity release for additional income, which helps thousands of people up and down the country live a better retirement.
Equity release allows homeowners who qualify the chance to release equity from their home, whilst being able to remain living in their home for as long as they want to.
However, there are alternative options available to you. In fact, if your home has more rooms or more space than you necessarily need, then you might want to consider renting out a room, or listing your property on Airbnb.
This is where the Government’s Rent a Room Scheme [1] comes into play for many people.
In fact, this scheme can earn you up to £7,500 a year from a tenant before you will have to pay any tax on this type of income. This is a significant amount, which you could use to spend on your lifestyle or home improvements.
In addition to the financial benefit the Government’s Rent a Room Scheme could bring, the scheme also provides people up and down the country with, for some, much needed company.
More and more pensioners are suffering from loneliness, and bringing in a lodger might be the best option for lots of people.
Please call our 24-Hour Helpline: 0330 058 1579
How the Rent a Room Scheme Works
If you want additional income and have a spare bedroom, then you might be able to qualify for the Government’s Rent a Room scheme.
This means that you can move a lodger into your home and charge them for your extra room.
Your income from this will be exempted from tax up to £7,500. If you share this form of income with a partner, then this will be halved [2].
You are able to let out as much of your home as you want. This could include just a room and a bathroom and kitchen, or could include other areas too such as your living room and garden.
If renting out a room in your home earns you more than the £7,500 tax threshold then you must complete a tax return. Once this has been done, you will then need to opt into the scheme and claim your tax-free allowance [2].
Who’s Eligible for the Rent a Room scheme?
The Government’s Rent a Room Scheme is open to anyone who owns their own home that lets out furnished accommodation to a lodger at their property.
This allows you to earn up to £7,500 tax-free every year, or £3,750 if you own a property with your partner or someone else [3].
If you do not own your property and simply rent it out, then you also might be eligible to let out a room to a lodger, as long as your lease and landlord allow you to do so.
It is important to always check with your landlord before looking into this type of scheme, as if your landlord says no then you will be unable to apply [3].
Please call our 24-Hour Helpline: 0330 058 1579
How Much Can I Earn Under the Rent-a-Room Scheme
As discussed above, you can make up to £7,000 a year through the Rent a Room Scheme without being charged tax.
This income limit covers everything you receive from your tenant including if you charge for any laundry or cleaning.
Beyond this, you can earn more money although you will be charged tax. This will then be classified as income and you will be taxed accordingly.
If you don’t want to use the Government’s Rent a Room Scheme but do want to rent out your home for some additional income, then you can opt out of this scheme. However, if you choose to do so then you will be taxed as normal.
Rent a Room Scheme and its Impact on Benefits
The Government’s Rent a Room Scheme is a fantastic option for lots of homeowners nearing or enjoying retirement.
However, opting for this type of scheme will have an impact on any means-tested benefits that you already benefit from or plan on benefiting from in the future.
1. Universal Credit and the Rent-a-Room Scheme
If you benefit from Universal Credit, then any money you get from letting out your home to lodgers under the Rent a Room Scheme will not be counted as income up to the tax-free allowance of £7,500.
2. Housing Benefit and the Rent a Room scheme
If you benefit from housing benefits then you will still be able to apply for the Rent a Room Scheme, but it will depend on how the individual renting the room from your home is classified.
For example, if you offer your tenant food then they will be classified as a boarder. This means that the first £20 of rental income you make each week from this isn’t taxable, as well as half of the rest of the rent you receive.
If you do not supply or offer food to your tenant, then they will be classified as a tenant or sub-tenant.
This means that the first £20 you make each week isn’t included in the taxable amount, but the rest of the income you make will be.
If this exceeds a certain amount, then it could have a negative impact on your Housing Benefit.
If you claim Housing Benefit and only have one room which you rent out, then you will not be subject to bedroom tax. If you have more rooms available, then you would be subject to bedroom tax.
3. Council Tax Reduction and the Rent a Room Scheme
Unfortunately, opting for the Rent a Room Scheme means that if you currently claim Council Tax Reduction, moving a lodger into your home will mean that this stops. You will no longer qualify for this type of discount because you are moving someone else into your home.
Please call our 24-Hour Helpline: 0330 058 1579
Pros and Cons of the Rent-a-Room Scheme
There are many advantages to opting for the Rent a Room Scheme. For example, the biggest advantage is that you can earn up to £7,500 a year, completely tax-free.
You are then free to spend this money on whatever you want, including improving your lifestyle, a family holiday or paying off a loved one’s University fees or helping them to put some money down for a house deposit.
Additionally, there are a number of health benefits (both physical and psychological) to getting a lodger in your home.
A lot of people suffer from loneliness and depression later in life, as they simply have no one to talk to.
Getting a lodger will help to keep you more sociable and ensure that if you were to have an accident, someone would be there to help or ring for an ambulance.
However, the biggest con to the Rent a Room Scheme is that you are unable to claim any expenses relating to letting out your home.
This means that if you have to spend your own money on anything related to letting out your home, including maintenance or re-painting or cleaning costs, then you will not be able to claim for these expenses.
Please call our 24-Hour Helpline: 0330 058 1579
How to Opt-Out of the Rent-a-Room Scheme
You are able to opt out of the Rent a Room Scheme, but will need to do so by 31st January.
You can do so by telling HMRC that you want to opt-out, either by writing to HMRC by the above date or by letting them know when you fill out your self-assessment tax return.
You will need to opt out of the scheme each year during your self-assessment tax return.
If you are wishing to opt out of the Rent a Room Scheme but are confused as to how, then make sure that you speak to HMRC, who will be on hand to offer you advice and support.
Can I Claim the Rent a Room Allowance on Airbnb Rentals?
At this moment in time, the Government does accept short-term rentals. This means that if you run a bed-and-breakfast or own an Airbnb then you will be able to apply for the Rent a Room Scheme.
Other alternatives to the rent-a-room scheme
If renting out a room in your home simply is not for you, then there are a number of different alternatives available to you.
Some of these are listed below for you. Depending on your personal circumstances, some might be more beneficial than others.
1. Extend your mortgage term
If you still have a mortgage, then you might be able to get your lender to agree to extending your term for another couple of years.
This would mean that your monthly mortgage repayments would be reduced, which would help to keep your outgoings low.
However, it is important to understand that some lenders have an upper age limit, meaning that you might not be able to increase your mortgage term due to your age.
2. Equity release
If you do not want to have to rent out a room in your home for some extra cash, then you might want to consider equity release.
Equity release is not for everyone, but it does allow individuals aged over 55 years old the chance to release equity from their home whilst not ever being forced to move out or sell up.
You don’t have to repay the loan until after you pass away or move into a care home, when your house will be sold and the proceeds used to pay off the loan amount.
3. Get a part-time job
Getting a part-time job is another alternative to the Rent a Room Scheme. Lots of retirees opt to get a part-time job so that they have additional income later in life.
Getting a part-time job is a great way of getting additional income as well as staying social and active later in life. There are many health benefits to getting a part-time job in retirement, including both physical and mental.
If you are considering getting a part-time job in your retirement, then you might want to consider jobs that aren’t particularly stressful, as stress has a huge impact on your mental and physical health as you age.
You might choose to get a part-time job walking dogs, working in a local garden centre, coffee shop or DIY store.
4. Change your spending habits
If you are struggling for money later in life, then you might want to consider changing your spending habits. This means that you might need to adjust your spending and make yourself a spreadsheet with all of your outgoings and incomes on, so that you can keep track of your spending.
Managing your spending might include some things such as quitting smoking, to save some money on cigarettes.
Alternatively, you might want to cut back on coffee or your weekly or monthly food shop.
Please call our 24-Hour Helpline: 0330 058 1579
Speak to Equity Release Warehouse
If you are entering retirement but are in need of some extra cash, then you might consider a few options.
You might want to consider the Rent a Room Scheme, or you might want to consider taking out an equity release loan.
If you are considering equity release, then make sure you speak to a member of the team at Equity Release Warehouse.
Our team is always on hand to offer you support and guidance and will never put any pressure on you to release money from your home unless you are confident that it is the right decision for you.
If this is something you want more information on to consider, then reach out to a member of our team today by calling us on 0330 058 1579 or by visiting our website online by searching for www.equityreleasewarehouse.com.
References
[1] https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme
