In May last year I wrote a blog about house hacking in the UK. It seems to been the most popular article on my site. I stopped “house hacking”, around October 2021, when my cousin/lodger moved out of the house. I have noticed a drop in my net worth growth, despite having a significant pay-rise! That is because my pay-rise at work, was around £10,000. After student loan, national insurance and income tax, that is down to £6000, or exactly £500 a month – which is how much I would rent my room out for. The calculations on this get even crazier when you get into 40% tax bracket. With student loans you are looking at around 60% of all income over £50,000 going to someone else.
The reason I think house hacking is so powerful, at least in the UK, as you can take the £500 quid (or max £625) and keep all of it. Therefore, you can put more money (that is subject to tax) such as PAYE, and put that into your pension. Thus significantly reducing your tax AND student loan burden, whilst maintaining exactly the same overall income. For me this is an incredible arrangement.
Rent a Room Scheme in Scotland?
The rent a room scheme has a much larger benefit for those living in low cost of living areas, such as (most of) Scotland. This is because there is an upper limit to the tax relief you are able to receive (£7,500), I believe this is per person. A married couple, and this is not financial advice, I expect could claim £7,500 each from two properties, it may be more difficult to do this for one property though! Definitely something I would be interested to explore further.
The reason the rent a room scheme is more powerful in Scotland and other lower cost areas, is simply that tax-free money goes further. The more you can earn without incurring any tax the better, and the life you can lead in a lower-cost area (or country!) would solve this.
My Future Plans with the Rent a Room Scheme
I haven’t gone back to having a lodger yet as I am working on an even grander plan. I am hoping that my girlfriend will move in with me, in fact, I have asked her and she said yes! This is obviously great from a relationship point of view, but also helps from a financial point of view.
- We won’t need to drive to and from each others houses – min £50 quid a month at the moment (30 minutes each way 2-3 times per week)
- We can save on food as almost all food shopping is made more efficient when you are cooking for two
- Split the bills, likely I will shoulder more of the cost as I don’t want to be profiteering off my girlfriend! However, likely she will make a tax-free contribution to bills and expense of around £400 – pretty close to my goal of £500, and I will much prefer living with her than a random lodger!
- Closer to FIRE for us both (although I haven’t told her about this aim, I think she thinks I am joking when I say 35 is my retirement age)
Rent a Room Scheme – Edinburgh Fringe:
One little nuance you may not be aware of, is that the £7,500 tax-free allowance does not take into account letting length. This means you could rent your spare room in Edinburgh during the Fringe festival for a much higher-rate (or potentially multiple rooms) and get as close to the £7,500 as possible. Thus you would be earning a huge amount of money per month, without the hassle of having someone living there all year round.
This could also be use for renting a room near a festival or anything similar. The trick is to look for events in the year that may cause a spike in prices, like reading festival and vacating your house for that period. I would suggest going on a holiday using the money you are making back home for the same period. This means you essentially end up with a holiday being paid for by someone else!
To conclude, this scheme is incredibly powerful, and we should all keep an eye on it to see if the tax-free allowance may rise, however, I think landlords are unlikely to be the first on the list of tax relief during the current cost of living crisis.
If you want to learn more about the rent a room scheme you can view more here: