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In these times of austerity, it is prudent to look around at what you have and see where you can make some extra cash or savings. One little known way is the HMRC Rent a Room scheme, where if in your main or only residence you have a spare room, you can let it out and receive the first £4,250 tax free. This may be ideal where children have grown up and moved out, or where as a student, fellow students can help with those tuition fees.

Your Debt Expert.com specialises in helping its clientís maximise their income and minimise their expenditure as a method of dealing with their finances and explains how the Rent a Room Scheme works.

First the scheme is only available to those who either rent or own their property and that property is their full or main residence. If you live abroad, you would unlikely qualify for the scheme as the property is unlikely to qualify as your main or only residence. If someone is thinking about using the scheme, they must also ensure they have their lender or landlordís permission to let the room: doing so without their permission may otherwise breach the terms of their tenancy or mortgage agreement. They will also need to check that their building and content insurance is adequate, as proceeding without checking could result in insufficient or an invalid policy.

The £4,250 that is tax free applies to the property rather than each room; however, if you move properties in any tax year the one £4,250 applies to both properties. Where you are letting out a room in a property that someone has already let out within the same financial year, the £4,250 is reduced to £2,125.

There are two ways you can be taxed in the Rent a Room Scheme and you can choose which you prefer and even move between them in different tax years to suit yourself, providing you notify HMRC of your choice.

Method A is to be taxed on the profit you make from letting the room. This is rents received minus expenses.

Method B is paying tax on your gross receipts minus the exemption amount.

Method A is automatic unless you notify the HMRC within the allowed timeframe.

For example:

Using Method A if you let a room for £6,000, but have expenses of £1,000, you are taxed on the £6,000 minus the expenses of £1,000. You are, therefore, taxed on £5,000. Under Method B you are taxed on the gross receipts of £6,000, minus the exemption amount of £4,250 which means you are taxed on £1,750. In such a scenario, Method B may be preferable.

Where Method A may be more to advantageous is where you have gross receipts of £8,000, but expenses of £4,500. This would mean you would be taxed on £3,500 under Method A. Under Method B, however, you would be taxed on your gross receipts of £8,000 less your exemption amount of £4,250, which would mean youíd be taxed on £3,750. Here Method A is more advantageous.

If you choose to be taxed under Method B, this continues until such time you notify HMRC that you wish to be taxed again under Method A. Where, however, your gross receipts drop below £4,250, Method B automatically ceases and you are exempt.

Professional tax advice should be sought before applying to the scheme and more information can be obtained from www.hmrc.gov.uk.

I wish we had a similar program here in Canada – once we get our room rented, all income earned is taxable. Fortunately, as an accountant, I also know there are legal deductions we can take to reduce that tax liability, but to be able to earn the first set amount tax free? That’s a bonus!