If you have an airbnb in your home then there are two ways to handle your Airbnb taxes. One uses the Rent a Room Allowance. The other involves calculating your airbnb income and deducting allowable expenses.
How to use the Rent-a-Room scheme
The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home
You can earn £7500 a year from airbnb and pay no tax (assuming you receive no other similar rent which might blur the picture such as an adjacent granny flat). If you own buy-to-let property this is separate to these calculations so can ignore that for these calculations. This applies to income earned on your own home that you live in. The important point here is the clue is in the name – Rent a Room (it’s rent from your own home).
Is the Rent a Room allowance too low?
The rent a room allowance is £7500 per tax year (starts early April). This works out at £20.54 per day. A significant amount you might say but certainly not big money. The average price for a spare bedroom per night in the UK is about the same amount (including all bills) on airbnb or otherwise. Of course this is higher in central London but I think generally its fair to say that only the best of places will charge far more. However thats every day of the year 365 days. Lets assume a high occupancy rate of 80-90%. So most days of the year. That makes a average rent a room tax free allowance of approx £25. This is GROSS price (or rent) so any costs have to be already included in the amount if your using the rent a room allowance (this part confuses people a lot).
IMPORTANT POINT TO REMBER IS THE RENT A ROOM ALLOWANCE IS ON GROSS INCOME – NOT NET OF EXPENSES. EVEN AIRBNBS HOST FEE (about 3%). YOU CANNOT DEDUCT EXPENSES FISRT. DON’T MAKE THIS MISTAKE.
So is the rent a room allowance too low? Well no maybe not. If you have only 1 spare room on airbnb then the allowance should just about cover you for the year with a healthy £25 a night income. However if you have more that one spare room then you might have to pay some taxes. That is unless you can convince any regulars customers to pay you in cash perhaps?
How to use the Rent a Room allowance for Airbnb Income
The examples on the money advice website are good so i recommend reading that. I won’t go into this too much here but using the rent a room allowance is going to suit the vast majority of people who let one or two rooms in their main home on airbnb.
If your income from the scheme is more than £7,500, you can pay tax in two ways:
- Option A: you pay tax on your rental income minus £7,500 (with no deduction for expenses or capital allowances)
- Option B: you pay tax on your actual profit (rental income minus expenses and capital allowances)
If your a Basic rate tax payer then you will pay 0% on airbnb income of £7500. If your income from Airbnb is £15,000 a year (approx 2 rooms let most of the year) then you will pay tax only on £7500 (£15,000 – the rent a room allowance £7500). If you a standard rate payer then the overall tax is £1500 (works out to 10% tax on your total airbnb income of £15,000). I think this tax amount is bearable.
Airbnb Expenses you can claim for tax purposes
What can you claim as an allowable expense for airbnb? The below is used only for airbnbs in your own home. An airbnb that is not in your main home is treated differently (like a normal buy to let) and is not covered here. This is for those who have a spare room on airbnb or let out their home on airbnb while away. REMINDER IF YOUR CLAIMING THE RENT A ROOM ALLOWANCE YOU CANT CLAIM ANY EXPENSES.
So lets start with the easy allowable expenses
1. The Airbnb host fee. This is the deduction airbnb takes out of your money before you get it. This is about 3%. Since you never see this money many hosts might even not be aware you pay it so perhaps this is best ignored anyway. The money you get into your bank account is NET of this fee and we shall refer to this net income as your airbnb income.
2. Direct costs. So this could be for example the free bottle of water you give your guest. Or could be toilet roll or something that gets used up every time a guest stays. In theory you need to keep your receipts to show the taxman if asked. However if the amount is so low it’s not worth anyones time you could get away with no receipts. Also sheets and bedding etc will need to be replaced occasionally. The amount i’m thinking of here is about £2 per booking. This could be higher if your supplying alcohol or meals.
3. Cleaning fee. Now this is a bit difficult. Yes of course you have to clean everything. This does have a cost. But what is that cost. If you guesstimate that it costs you about £1 or £2 in water, electricity and soap etc to clean all the sheets and everything then probably thats fine. But you cant double count this if you’re apportioning utilities in the harder to explain allowable expenses section also. Also you cant charge for your own time. This is self defeating as that will also be your own taxable income. If you’re paying someone else to clean this is another matter.
4. Accounting and software expenses for doing your tax return.
5. A paid cleaner or key giver or some other person you have to pay to keep your business going. This could be a family member who is perhaps not working full time and has a low income (and therefore pays less tax). Paying a relative who otherwise would not be earning any money at all is possibly one of the better tax planning strategies. Knocking up some simple documentation as evidence of work such as a invoice is actually easy. BUT I highly recommend keeping the annnual amounts below the tax free threshold (£12,500 in the UK) to avoid any complications.
So so far you can claim the airbnb fee (which you never see) and perhaps £2-4 in running costs without any significant documentation needed to prove the expense (I highly doubt HMRC will want to trail though your supermarket receipts). Expenses for producing your tax return such as software and accountancy fees will be very low since this is not a complex business. You can’t claim huge sums for this or it will raise serious eyebrows. £100 a year sounds reasonable to me. If your paying your wife to be your cleaner then perhaps £10 per trip (unless you clean the room every day this will be per completed trip) so if it’s 300 nights a year with an average of 2 nights per trip then lets call is 150 trips @ £10 = £1500. So far we have
I work this out at income of 300 nights @ £25 per night = £7500. Each trip setup costs is £2 misc direct expenses such as water (point 2 above). Plus cleaning fee of £10 say per trip. 150 trips per year @ £12 (£10 + £2) = £1800. Plus lets say accounting and office fees of some sort £100 per year. So the math is 7500 – 1800 – 100 = £5600 taxable income per room approx
The rent a room allowance is £7500. This is the same as our income above and is tax free. So if you have one private room the you will want to use the rent a room allowence and pay zero tax. If you have two private rooms in your house then you can double the figures in the example above and get £11,200 (£5600 x 2 rooms) taxable income. Depending on your income tax band you could have to pay 20% (£2240) or 40% (£4480) income tax on this. Some serious money you own to the taxman. More rooms will multiply these figures.
Using these simple deductions like these are easier to understand and prove to the taxman and therefore less likely you will get into any trouble with the law. However they only reduce the tax you will pay by about a quarter at best. You’re still paying about 15 or 30 percent income tax on your airbnb income depending on your tax band.
Ok so the harder to explain allowable expenses
- Bank Interest. This is for most people your mortgage. Usually this is anyones biggest cost and possibly the whole reason why be an airbnb host in the first place. So can you claim your mortgage payments as an expense? The big mistake made here by many is to consider the entire mortgage payment and not just the interest. Only the interest is your expense. Not the reducing balance payment. So if you monthly payment in £1000 and half of that is the actual interest cost, then you can only claim a maximum of £500. NOT the full £1000. I have seen many people get confused over this. The reducing balance payment is money you are paying yourself (paying off a loan) and is NOT your expense. But this doesn’t go far enough as you need to work out how much of that cost (£500 in this example) is paying for you and how much is your airbnb. If you have one private room airbnb in your house it could never be more that 50% (but probably less since you presumably have more control of the house that the guest). So your maximum deduction would be £250. If you have more private rooms like say 2 maybe you can claim 66%? There is another problem with this method and that is capital gains tax which i explain in the notes below.
- Utilities such as gas, power, water, internet, and such. Again you need to portion this amount to what’s actually used by the guest and not by you. This is near impossible of course so you have to use some sort of sensible % method. My own monthly bills for these comes to approx £300 including insurance etc so if we are using 50% then we can claim £150.
NOTE: Your family home is not liable for capital gains tax when you sell it (a buy-to-let property is as this is classed as a business). BUT if your going to start deducting the mortgage interest on your own home as a allowable expense against your airbnb income then you could be liable for capital gains tax on your own house. This could be a disaster. So use this method sparingly.
Also Note: the fist £1000 of rent is a tax free allowance (unless using the rent-a-room scheme) to complicate things further.
Airbnb provides a very brief guide to what it thinks might be allowable expenses on it’s website. However it is very candid and makes clear that you should take professional advice.
Deductible items may include rent, mortgage, cleaning fees, rental commissions, insurance, and other expenses. Other factors you might consider when assessing taxable income include renting vs owning the space, number of nights hosted, tax status, and total net amount earned
You have to use some common sense here when applying your income and expenses. Huge claims of expenses or income would arouse the suspicion of the taxman. So unless you have solid proof these are genuine expenses claims then be conservative. HMRC will not be expecting someone with a normal home and a couple of spare rooms to be claiming huge deductions on their income so be careful you don’t overdo it.
So what’s my conclusion on airbnb tax?
Before we get into which is best we need to know your marginal tax rate. Here are the UK current tax bands April 2020 to April 2021
Also note the fist £1000 of rent is a tax free allowance (unless using the rent-a-room scheme) to complicate things further.
If like me your a higher rate payer (40% tax on income over £50,000) You might want to consider bringing down your accessible income by contributing to your work pension scheme. This not only brings down your taxable income but can also greatly increase the amount you put in your pension. This is capped at £40,000 a year but for most people this is more than enough. I personally find this very legal way of reducing tax and increasing my personal pension savings to be the best thing I will ever do after buying my own home.
So what method do I use? Using the rent a room allowance makes the best sense for the majority of hosts who let private rooms in their house. Unless you have huge income and expenses to match the £7500 tax free allowance will cover a lot of the income and assuming your a basic rate taxpayer the tax on the amount above this threshold will be overly onerous (no one likes to pay tax but you will just have to accept it, thats my advice). I use exactly this method.
One simple rule is – If you receive more than £7,500 from a lodger you’ll need to complete a tax return.
You will need to register for self assessment AND tell HMRC if your not using the rent a room allowance OR you are using the rent a room allowance and will exceed the £7500 threshold.