Rent a Room and limited company contracting

[northernladuk]

I imagined, as have some other contractors I've spoken to incidentally, that given that the rent a room allowance provides

Never take financial/tax advice from other contractors. They are a set of money grabbing mercenaries that don't know their arses from their elbows.

[TheCyclingProgrammer]

Makes sense. I got confused because I'm sure in some places it's referred to as tax "relief" which is of course not quite the same thing as tax "exempt".

[andy m]

Hi all and thanks for the responses!

For what it's worth the original opinion I queried was from my accountant! Perhaps I need a new one! I took the opportunity to clarify with HMRC via their online chat session (HMRC providing actually useful support!) and got the following:

Q: Hi. If I rent a room and choose to use the rent a room scheme the income (up to £4250) is "tax free". Does this income still count re: the higher tax threshold? I.E. If I earned £41,865 (assuming my personal allowance is £10,000) do I now have to pay higher rate tax on £4,250 of this as a result of earning the 'tax free' money through the rent a room scheme?

A: Hi, because the rent a room relief amount of £4250 is tax exempt, it would not be included in calculating your total income for higher rate tax purposes.

So it's all good and I've set my accountant straight too!

Thanks again!

[d000hg]

I asked my accountant as we have a lodger and was told it's pretty transparent - it doesn't affect your taxation. My wife and I own our house and IIRC she doesn't even have to declare her half (she doesn't do a SATR as she has a proper job).

[Maslins]

Unclear from the OP whether the "tenant" will be Yourco, or a "normal" human?

It does need to be an individual. If it is, then great, you can receive rent of up to £4,250/year without suffering any personal tax, and it won't impact on what dividends etc you can take.

If you were anticipating the tenant being Yourco, afraid you can't. See here.

[ASB]

If you use the rent a room scheme you simply tick a box on the satr. It makes no difference at all to your taxation. The money is exempt. Subject to the limits.

However the accom provided has to be within the scope of the scheme. Basically this means getting some cash from a notification n related 3rd party.

this excludes the more creative attempted usages like your business renting a room for its business use.

that was entirely successful until one of my numerous investigations.

[TheCyclingProgrammer]

My understanding has always been the opposite - the £4,250 is completely exempt and therefore has no effect on other allowances or rate bands. Therefore the amount of dividend that can be drawn at BR doesn't change.

Trying to confirm this quickly hasn't been easy, but see comments under SA200 at SAM121560 - Returns: individuals returns: rent a room for traders

if HMRC don't want receipts of less than £4,250 reported then inter alia the amount cannot effect tax liabilities.

Well, OP would be best listening to you or their own accountant rather than me, but I also had trouble finding anything to confirm either way. What you say makes sense though. If it doesn't have to be reported then it shouldn't affect anything.

Might be worth a call to HMRC to clarify, just in case?

[Jessica@WhiteFieldTax]

Logically, I'd assume that all income (salary, dividends and rental income) would be added together, you would then apply the personal allowance to your salary+dividends, the RaR relief against the rental income only and what is left is taxable, so I would assume that RaR income would reduce what OP could take in dividends before hitting the higher rate threshold.

My understanding has always been the opposite - the £4,250 is completely exempt and therefore has no effect on other allowances or rate bands. Therefore the amount of dividend that can be drawn at BR doesn't change.

Trying to confirm this quickly hasn't been easy, but see comments under SA200 at SAM121560 - Returns: individuals returns: rent a room for traders

if HMRC don't want receipts of less than £4,250 reported then inter alia the amount cannot effect tax liabilities.

[TheCyclingProgrammer]

TCP is correct with additional complications if the property is jointly owned or main residence for only part of the year. The income, subject to limits and conditions are exempt from IT.

As with all things like this, consult a professional.

Edited above; it still seems logical that rental income would still contribute towards gross income, even though its effectively exempt after applying RaR relief, thus reducing dividends before higher rate kicks in.

Surely this is something OPs accountant could answer with a quick email?

[tractor]

...

OPs question seems legit to me. The RaR scheme lets you earn up to £4250 a year from renting out a room in your main residence and is exempt from tax. OPs question appears to be, is this exemption on top of the existing personal allowance for income tax and if so, is there any need for them to adjust their salary/dividends that they take from TheirCo to avoid paying any extra tax.

It would appear that Rent a Room would mean OP gets additional tax relief in addition to their normal personal allowance. So they could earn £4250 in rent, which is tax free, £10k (assuming they have full personal allowance) in income tax free (probably their main salary) and take the usual amount of dividends up to the higher tax rate threshold (about £31k or so).

I think it still has to be declared on a self-assessment if OP already does one though.

TCP is correct with additional complications if the property is jointly owned or main residence for only part of the year. The income, subject to limits and conditions are exempt from IT.

As with all things like this, consult a professional.

[TheCyclingProgrammer]

Do you not understand the concept of "personal taxation"? You pay tax on whatever you earn, from whatever source. There's nothing magic about YourCo's money, other than it isn't your money.

Otherwise, what SS said...

OPs question seems legit to me. The RaR scheme lets you earn up to £4250 a year from renting out a room in your main residence and is exempt from tax. OPs question appears to be, is this exemption on top of the existing personal allowance for income tax and if so, is there any need for them to adjust their salary/dividends that they take from TheirCo to avoid paying any extra tax.

It would appear that Rent a Room would mean OP gets additional tax relief in addition to their normal personal allowance. So they could earn £4250 in rent, which is tax free, £10k (assuming they have full personal allowance) in income tax free (probably their main salary) and take the usual amount of dividends up to the higher tax rate threshold (about £31k or so).

Or does the £4250 still count towards gross earnings, even though it has special tax relief, thus reducing the amount of dividends that OP could take before reaching the higher rate threshold.

Logically, I'd assume that all income (salary, dividends and rental income) would be added together, you would then apply the personal allowance to your salary+dividends, the RaR relief against the rental income only and what is left is taxable, so I would assume that RaR income would reduce what OP could take in dividends before hitting the higher rate threshold.

That's not necessarily a bad thing though - OP still gets the same level of net income after applying RaR relief but gets to leave additional profit in their company for a rainy day.

[andy m]

Do you not understand the concept of "personal taxation"? You pay tax on whatever you earn, from whatever source. There's nothing magic about YourCo's money, other than it isn't your money.

Otherwise, what SS said...

Apologies - clearly this was a stupid post (now edited by the way). I imagined, as have some other contractors I've spoken to incidentally, that given that the rent a room allowance provides for 'tax free' earnings over and above the personal allowance that this might also apply for limited company contractors - I.E. I'd still pay the same tax I currently pay on the same income and dividends I currently take.
Otherwise it seems that the rent a room scheme, for me, would result in additional tax - unless I reduced my dividends from the company.

[malvolio]

Do you not understand the concept of "personal taxation"? You pay tax on whatever you earn, from whatever source. There's nothing magic about YourCo's money, other than it isn't your money.

Otherwise, what SS said...

[Sausage Surprise]

You are renting a room in your own house or you are renting out a room to someone else?

[andy m]

Hi,

I currently contract through a limited company and am considering renting out a room in my house - using the rent a room allowance. I'm confused, however, on how this affects the amount I can take out of the company and remain tax efficient.

One opinion seems to be that I would have to reduce the amount I took from the company in dividends - the logic goes that whilst I could earn up to £4,250 tax free through the rent a room scheme this still counts towards the higher rate tax threshold which is not affected by this extra 'allowance'.

Is this correct?

I'm pretty sure I've heard of others who are claiming dividends and earning an income via the rent a room scheme (perhaps by not declaring it on their self assessment return if they're earning < £4,250 annually?).

Many thanks

Andy