Calls to increase UK Rent a Room tax threshold to boost lodger supply

Calls to increase UK Rent a Room tax threshold to boost lodger supply

A flat-sharing service has urged the Chancellor to raise the UK Rent a Room Scheme’s tax-free threshold in the upcoming Budget, citing a decline in lodger room supply and pointing to Ireland’s recent increase as a model.

The Spareroom website highlights that lodger rooms accounted for nearly a third of UK flatshare supply in Q3 2026 but are now falling year on year, with inner London seeing a sharper decline. The current UK tax-free threshold of £7,500 has remained unchanged for a decade, while Ireland recently raised its equivalent threshold from €14,000 to €16,000. Spareroom argues that increasing the threshold would incentivise more homeowners to rent out spare rooms, easing rental supply pressures and offering cheaper accommodation options.

Declining lodger rooms and tax relief comparison

According to Spareroom’s analysis, lodger room supply peaked shortly after the last UK threshold increase in 2016 but dropped significantly during the Covid-19 pandemic and has yet to recover. In the third quarter of 2026, lodger rooms made up 29% of the total UK flatshare market, but this figure has declined by 1.4% year on year. Inner London’s lodger supply, representing 17% of the total, fell by 2.9% over the same period.

The UK’s Rent a Room Scheme allows homeowners to earn up to £7,500 tax-free from renting out furnished rooms to lodgers, but this limit has not been increased since 2016. In contrast, Ireland recently announced a rise in its rent-a-room relief threshold from €14,000 to €16,000, reflecting higher rental prices and inflation. Spareroom suggests the stagnant UK threshold discourages potential lodger landlords, who face the burden of tax returns if they exceed the limit.

Matt Hutchinson, Spareroom’s director, emphasises that the current £625 monthly tax-free limit does not align with today’s rental market, pushing many to complete tax returns and deterring participation. He advocates for an updated threshold that keeps pace with rental inflation to stimulate the lodger market.

Impact on rental supply and affordability

Lodger landlords provide more than just supplementary income; they contribute to the overall rental supply with rooms that are on average £515 cheaper annually than those offered by traditional landlords. This affordability aspect benefits renters struggling with rising housing costs.

With an estimated 28 million empty bedrooms across England, Wales, and Scotland, Spareroom notes that unlocking just 5% of these rooms for lodgers could create affordable housing for approximately 1.4 million people. This potential supply boost would not require new construction but better utilisation of existing housing stock.

To ensure the scheme supports genuine lodger arrangements rather than short-term holiday lets, Spareroom proposes adding a minimum stay requirement of 31 days. This would prevent misuse of the tax relief and maintain the supply within the long-term rental market.

Policy context and landlord considerations

The Rent a Room Scheme has been a popular tax relief for homeowners letting out spare rooms, but its unchanged threshold over a decade has limited its effectiveness amid rising rents and inflation. The call to update this threshold aligns with broader government efforts to increase affordable rental supply without large-scale building projects.

For landlords and letting agents, an increase in the threshold could encourage more homeowners to consider lodger arrangements, potentially easing pressure on the private rented sector. However, it also raises questions about compliance, tax reporting, and the definition of lodger versus tenant, which require careful management.

Landlords should monitor any Budget announcements closely for changes to the scheme and consider how adjustments might affect their portfolios, especially if they currently accommodate lodgers or are considering doing so. Clear communication with lodgers about tenancy terms and tax obligations will remain essential.

What landlords and agents should prepare for

Should the Chancellor increase the Rent a Room tax-free threshold, landlords will need to update their financial records and possibly adjust rental agreements to reflect new limits. Letting agents might see increased demand for lodger placements and should be ready to advise clients on the implications.

Compliance with tax regulations will remain critical, particularly regarding income declaration and eligibility for relief. Landlords should ensure they understand the distinction between lodgers and tenants, as well as any new conditions such as minimum stay requirements that may be introduced to prevent misuse.

Keeping abreast of official guidance and seeking professional advice where necessary will help landlords and agents manage the transition smoothly and benefit from any new incentives.

Supporting landlords with compliance and management tools

The Landlord Association (TLA) offers members access to compliance resources and practical information that can assist in adapting to changes in tax relief schemes like Rent a Room. Through TLA’s new property management and compliance platform, ORBIT, currently in BETA testing, landlords and letting agents can organise property records, manage rental documentation, and record key actions related to lodger arrangements.

ORBIT’s developing features aim to help users keep evidence of compliance activities, monitor regulatory updates, and maintain clear records of communications and tenancy terms. While still in testing, ORBIT represents a useful tool for landlords preparing for potential changes in tax thresholds and related obligations.

Exploring TLA membership and accessing member compliance support can provide landlords with timely updates and guidance to navigate evolving rental regulations effectively.

Looking ahead, any Budget announcement increasing the Rent a Room threshold could stimulate the lodger market, offering landlords new opportunities and renters more affordable options. Landlords should stay informed and ready to adapt their practices accordingly.

Sources: Landlord Today