Many people think that Rent a Room is a tax free allowance, a bit like the personal allowance, but its not quite as simple as that.
If your total rent from a room in your home is less than £7,500 then that’s fine, but if your rent is above £7,500 these rules will apply
3.2 If your gross receipts are more than the Rent-a-Room limit
If your gross receipts are more than £7,500 (or £3,750), you can choose how you want to work out your tax:
You pay tax on your actual profit – your total receipts less any expenses and capital allowances.
You pay tax on your gross receipts over the Rent-a-Room limit – that is, your gross receipts minus £7,500 (or £3,750). You can’t deduct any expenses or capital allowances if you choose this method.
HMRC will automatically use your actual profit (Method A) to work out your tax.
If you want to pay tax using Method B, you need to tell HMRC within the time limit. You will continue to pay tax on your gross receipts over the Rent-a-Room limit until you tell HMRC that you want to change back to paying tax on your actual profit (Method A).
If you pay tax using Method B, this automatically stops if your rental income drops below the £7,500 (or £3,750) limit.
So in most cases if you have rent above £7,500 you probably won’t want to claim Rent a Room because you will not be able to offset any expenses!