Rent-a-Room tax relief and Property Income Allowance
Capped at 7,500 per year, the rent-a-room tax relief allows you to let a furnished room in your main residence and be exempt from paying tax on the rental income. However, there are some restrictions and the rent–a–room allowance only applies to rooms being let for residential accommodation and does not apply to a room that may be used as an office or for storage.
The good news is that there is a new letting allowance available that gives you more ways to maximise your tax efficiency. Providing total rent does not exceeded £1,000 per year, rental income that does not qualify for rent-a-room allowance can now also be tax free.
Should your letting provide you with income in excess of £1,000 you may elect to either deduct the allowance from your gross rents but not claim the expenses you have incurred, or to calculate the taxable rental income, ignore the allowance, but deduct any allowable expenses. So the election is only beneficial if your expenses are less than £1,000.
Unfortunately there are a number of restrictions on the use of the new property allowance, which cannot be used against income from a home office with the rent being paid for by your own company, or by a company that employs you or a family member. And, it is not available where you are claiming tax relief for loan interest paid in respect of the property.