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Compliance20 October 2026·15 min read

Rent-a-Room Relief vs the £1,000 Property Allowance: Which Is Better for You?

Rent-a-room relief covers a furnished spare room let in your own home, up to £7,500 a year (£3,750 if shared). The £1,000 property allowance covers other small property income and cannot be used on room-letting income. This guide explains which applies, when to opt out, how to report each to HMRC, and where Making Tax Digital fits.

If you let a furnished room in your own home, rent-a-room relief is the tax relief that applies to that income. You can earn up to £7,500 a year from it tax-free (£3,750 if you share the income with someone else). The £1,000 property allowance is a separate relief for other small amounts of rental income, and HMRC says plainly that you cannot use it on income from letting a room in your own home under the Rent a Room Scheme. So for a lodger the question is rarely "which is better". It is whether to stay in rent-a-room relief or opt out and claim actual expenses.

This article covers who qualifies, how to claim rent a room relief, when opting out pays, how each relief is reported, and what to check about Making Tax Digital. It is written for homeowners and tenants who rent out a room, and for small landlords with modest property income.

What each relief is, side by side

Rent-a-room relief Property allowance
What it covers Income from furnished accommodation in your only or main home Income from land or property generally
Amount £7,500 a year, or £3,750 if the income is shared Up to £1,000 a year
Can it be used on room-letting income in your own home? Yes, that is its purpose No
Expenses None if you use the relief; actual expenses if you opt out None if you use the allowance
Below the limit Automatic exemption; nothing to do No need to tell HMRC or declare it, but keep records
Can it create a loss? No No

Each relief works differently once you cross its limit. The sections below take them in turn.

The Rent a Room Scheme: what it is

The Rent a Room Scheme lets you earn up to a tax-free threshold of £7,500 per year by letting out furnished accommodation in your home. GOV.UK says the threshold is halved to £3,750 if you share the income with someone else. A joint owner who also receives letting income from the same property is the usual example. You can let as much of your home as you want.

The law behind it is in the Income Tax (Trading and Other Income) Act 2005. Section 309 says the rules for calculating the profits of an individual's UK property business are subject to Chapter 1 of Part 7 (rent-a-room relief). That Chapter gives relief on income from furnished accommodation in the individual's only or main residence.

Two points about the tax-free threshold catch people out.

The test is on gross receipts, not profit. Gross receipts are your rent plus any charges for meals, cleaning, laundry or other services, counted across the whole tax year. If you charge £600 a month rent and £50 for utilities, the full £650 counts. The total rent and charges you receive is what is tested against the limit, before any expenses.

The limit belongs to you, not to the property. If you let a room in your old home and your new home in the same tax year, the receipts from both are added together and tested against one limit. If the combined total stays under it, there is no tax on those lettings.

Renting out a spare room: who and what qualifies

GOV.UK says you can opt in to the scheme at any time if you are a resident landlord, whether or not you own your home, or if you run a bed and breakfast or a guest house. So a homeowner with a spare room can use it, and so can a tenant, provided the lease allows subletting. Check your lease, your mortgage terms and your home insurance before you take anyone in.

To let out furnished accommodation under the scheme, the room must be:

  • furnished;
  • part of your only or main home at the time it is let.

The relief does not apply where:

  • the accommodation is unfurnished;
  • the space is used by the lodger as an office or for another business purpose (a lodger who occasionally works from home in the evenings or at weekends, or a student using a study area, does not trigger this);
  • the home has been converted into separate flats. GOV.UK states you cannot use the scheme for those;
  • you do not live in the property. If you or a member of your household are not living there during the letting, the relief is not available. Letting your whole home while you are away is the common case;
  • you live abroad and let your UK home. The property has to be your only or main home when it is let.

Meals, cleaning and short-term lets

Providing meals, laundry or cleaning does not take you out of the scheme. The charges you make for them simply count towards your £7,500 along with the rent.

For short-term lettings, including those arranged through an online platform, apply the same tests as for any other letting: furnished accommodation, in your only or main home, where you or your household are living. If you meet them, the scheme can apply. If you do not, it cannot, however the booking was made. Read the Rent a Room helpsheet that GOV.UK points to for the detail on your own arrangement.

How to claim rent a room relief

Below the limit, you do nothing. GOV.UK says the exemption is automatic if you earn less than your threshold, which means you do not need to do anything. You need not tell HMRC and no tax return is needed for this income alone. If you are asking whether you need to declare the income, the answer for rent-a-room receipts under the limit is no. Keep a record of the rent you receive anyway. You will want it if your receipts rise or you later decide to opt out.

Above the limit, you must complete a tax return. If your rental income exceeds the limit, you can then opt into the scheme and claim your tax-free allowance on that return. Alternatively you can choose not to opt in, and record your income and expenses on the property pages. Your choices are:

  • Method A: tax on actual profit. You record your income and expenses on the property pages of your tax return and are taxed on the profit. This is the default, and it applies unless you elect otherwise.
  • Method B: pay tax on the excess. You deduct the £7,500 (or £3,750) from your gross receipts and pay tax on the difference. You cannot deduct any expenses or capital allowances.

If you are not already registered for Self Assessment, register by 5 October after the end of the tax year. The return is due by 31 January after the tax year. For 2025/26 that means 5 October 2026 to register and 31 January 2027 to file.

Pay tax on actual profit: when it makes sense to opt out

Opting out means choosing Method A and being taxed on receipts less your actual expenses, rather than on receipts less the fixed £7,500. Compare the two each year. Opting out pays when your genuine expenses for the letting are higher than the limit.

Here is a worked example. You receive £9,000 in gross receipts for the year.

Method A (actual expenses) Method B (rent-a-room)
Receipts £9,000 £9,000
Deduction £2,800 expenses £7,500 limit
Taxable income £6,200 £1,500

With £2,800 of expenses, Method B is clearly better. If your expenses for the year were £5,000, Method A would leave £4,000 taxable, which is still more than the £1,500 under Method B. The expenses would have to exceed £7,500 before Method A beat the relief on these figures. For most people with a single lodger, Method B wins.

Capital allowances. Can you claim them under rent-a-room relief? No. Under Method B you cannot deduct any expenses or capital allowances. If you want them, you must be taxed on actual profit (Method A).

There is a separate reason to opt out even when Method B would produce less tax: losses. You cannot create a loss under the automatic exemption or under Method B. If the letting costs more than it brings in and you want to carry that loss forward against future rental profits, you have to opt out and be taxed on income less expenses (Method A).

The time limit is worth knowing. If you do not want the scheme to apply when your receipts are below the limit (to claim a loss, say), or you want to start or stop Method B, you must tell HMRC within one year of the 31 January that follows the end of the tax year. For the year ending 5 April 2024, that 31 January is 31 January 2025, so you would have to tell HMRC by 31 January 2026. Miss it and the default position stands for that year. The time limit is extended only in exceptional circumstances, such as serious illness that made it impossible to deal with your tax affairs.

You can switch between methods from year to year. Once you elect for Method B, you stay on it until you tell HMRC you want to switch back, though it stops applying in any year when your receipts fall within the limit.

If you do opt out, you will need to know what you can deduct. We set out the main categories in landlord expenses you can claim. If you only let part of your home, expenses have to be apportioned to the part let. The tax implications of getting this wrong are mostly practical: you either lose the expenses you could have claimed or you pay tax on more than you needed to.

Rental income and the £1,000 property allowance

HMRC's guidance on tax-free allowances for property and trading income says you can get up to £1,000 each tax year for property income, and a separate £1,000 for trading income, from 6 April 2017. The property allowance is a tax exemption of up to £1,000 a year for individuals with income from land or property.

There are two outcomes, depending on how much rental income you receive.

Gross property income of £1,000 or less (full relief). You do not have to tell HMRC or declare the income on a tax return, though you may need to file one for other income. You must keep records. Gross income here means the total before any allowances or expenses are taken off.

Gross property income over £1,000 (partial relief). You can deduct the £1,000 from your income instead of deducting actual expenses. You cannot deduct more than your income, so the allowance can never create a loss. If you own a property jointly, each owner gets the £1,000 against their own share of the gross rent.

HMRC also sets out when you must get in touch:

Gross property income What to do
£1,000 or less Nothing to declare, unless you cannot use the allowances. Keep records
Over £1,000 up to £2,500 Contact HMRC
Over £2,500 Register for Self Assessment

If your gross income for the year is more than £1,000 and you need to register, do so by 5 October in the following tax year. If you are already in Self Assessment, you claim the allowance by deducting it on your return. You cannot deduct any other expenses or allowances if you do.

When you cannot use it

The property allowance is unavailable if:

  • you claim the tax reducer for finance costs, such as mortgage interest on a residential property;
  • you have the income from a company you or someone connected to you owns or controls, a partnership in which you or a connected person are a partner, or your employer or your spouse's or civil partner's employer;
  • you deduct expenses from income from letting a room in your own home instead of using the Rent a Room Scheme.

One more rule matters if you have two property businesses. If you claim the allowance for one, you may not claim actual expenses for the other.

Which tax relief is better?

You let a furnished spare room in your main home. Use rent-a-room relief. The property allowance is not available for that income. Below £7,500 (or £3,750 if shared) it is automatic. Above it, compare Method A and Method B each year. If you drop out of the relief and deduct expenses on the room, you also lose the property allowance for that income. The two do not stack on the same money.

You are a landlord with small property income that is not a room in your home. The rent-a-room relief does not apply, so the question is allowance or expenses. Take a worked example: you receive £1,800 gross from a small let.

  • With the allowance, you deduct £1,000 and are taxed on £800.
  • If your actual expenses are £400, deducting them leaves £1,400 taxable. The allowance is better.
  • If your actual expenses are £1,500, deducting them leaves £300 taxable. Expenses are better.

HMRC's guidance puts it the same way: if your expenses are more than your income, it may be better to claim expenses instead of the allowance. The break-even point is when your expenses reach £1,000. Expenses also mean you can record a loss, which the allowance never allows.

You have both a lodger and another rental. The lodger income stays under rent-a-room relief. The other rental can use the property allowance if none of the exclusions above apply. Whether your particular mix works depends on the detail, for example whether you claim finance cost relief on the other property, so take property tax advice before you file if you are unsure.

Tenants and landlords: council tax and benefits

If you take in a lodger you remain responsible for council tax. You can include a contribution towards it in the rent you charge, and that contribution counts towards your £7,500. A single occupier who has been getting a 25% council tax discount loses it once a lodger moves in.

If you claim the property or trading allowances rather than deducting expenses, your income is reduced by them for tax credits, the high income child benefit charge, student loan repayments and the married couple's allowance. HMRC states that income for Universal Credit purposes is not affected by the allowances. If you receive Universal Credit or another means-tested benefit, ask the body that pays it how lodger income is treated before you take anyone in, because the tax treatment and the benefit treatment are separate questions.

Housing Benefit is more complicated still. If you rent from a social landlord and want to take a lodger, or you are considering a lodger who claims Housing Benefit, check the position with your local authority first.

Making Tax Digital

Making Tax Digital for Income Tax is expanding in 2026 and 2027, which is why landlords are asking about it now. Whether it applies to you is decided by your total qualifying income and the start dates HMRC sets, not by which relief you use. We have not set out thresholds here because they are for HMRC's current guidance to settle, and you should check your own position against it before assuming you are in or out.

Two practical points follow from how the reliefs work:

  • If your only letting income is a lodger under £7,500, the relief is automatic and you have nothing to report for it. Your other income may still bring you into the rules.
  • If you co-own the property, your share of the income is what matters for you. Our piece on jointly owned property and the MTD threshold explains how that works.

Whatever applies, keep good records. Both reliefs depend on them: HMRC can charge a penalty if the records you keep are not accurate, complete and readable, or are not kept for the required period. Typical records are bank statements, a spreadsheet of rent received, and emails confirming payments.

Frequently Asked Questions

Do I need to tell HMRC if I earn less than £7,500 from a lodger?

No. The exemption is automatic below your threshold, which is £3,750 if you share the income. You need to act only if you want to opt out, for example to claim a loss.

What happens if my rental income goes over the limit?

You must complete a tax return. You can take the £7,500 (or £3,750) off your receipts and pay tax on the excess, or opt out and pay tax on your actual profit after expenses. You cannot do both for the same year.

Can I claim capital allowances under rent-a-room relief?

No. Under Method B you cannot deduct any expenses or capital allowances. If you want them, you must be taxed on actual profit (Method A).

Can I use the scheme if I provide meals or cleaning?

Yes. The charges for those services count towards your gross receipts alongside the rent, so they use up part of the £7,500.

Can tenants use the scheme, or is it only for homeowners?

Tenants can. GOV.UK says you can opt in whether or not you own your home. A tenant needs the landlord's permission to sublet, so get it in writing and check your lease.

Can I run a bed and breakfast under the scheme?

GOV.UK says you can opt in if you run a bed and breakfast or a guest house. Charges for meals and services count towards the £7,500 limit.

Can I use the £1,000 property allowance for my lodger's rent?

No. HMRC says you cannot use the property allowance on income from letting a room in your own home under the Rent a Room Scheme.

Next step

Where the choice is close, such as receipts above £7,500 with real expenses, or a lodger plus a separate rental, the sums are worth doing both ways before you file. Deplexify prepares accounts and tax for UK landlords, and the UK property page describes what we do for them.

Sources

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