Increase Your Income By £4,250 Tax-Free!

Find out the clever way to boost your income and beat the credit crunch.

If you're struggling to make ends meet, how do you cope? By making budget cutbacks, perhaps, or raking in the overtime? Neither is particularly appealing. Interestingly, a growing number of people are turning to more unusual methods by renting out spare rooms in their homes for extra cash. In fact, this has increased by more than 8% in the past year.

This is not entirely surprising given that the cost of living is rising fast. Everyday expenses are increasing far beyond the government's official rate of inflation. And a combination of rising food, fuel and energy prices alongside more costly mortgages is pushing many budgets to breaking point.

Taking in a lodger may seem pretty radical, but there are obvious advantages for both landlord and tenant. For the landlord, renting out a spare room can help to ease the burden of a mortgage, while the lodger has a better chance of being offered good quality accommodation because the landlord is living there too.

Demand from tenants is strong as would-be first-time buyers are being forced into delaying property purchases. These days, lodgers are often professionals who want a decent place to live, but simply can't afford to buy themselves.

Rent-a-room

Renting your spare room doesn't have to be complicated. Thanks to the government's Rent a Room scheme, you can earn up to £4,250 in rental income without paying a single penny in tax. If you rent out a room jointly -- perhaps as a couple -- you can each earn up to £2,125 tax-free.

Better still, you won't have to declare this income if you don't normally complete a tax return, and there's no need to apply for the scheme either. The exemption is automatic -- what could be easier?

That means you could earn over £350 a month from your spare room totally tax-free! You don't even need to be a homeowner to benefit from the scheme. If you're a tenant yourself -- and your landlord agrees -- you can rent out a room too.

Of course, there are some rules:

• The room you let has to be furnished.
• It has to be a room in your main residence.
• The lodger can occupy a single room or an entire floor, but it must be part of your home.
• You can't claim for any expenses such as wear and tear, repairs or insurance.
• If your rental income is above £4,250, you must complete a tax return and claim the allowance.

Seasonal lodgers

You could boost your income temporarily by taking on seasonal lodgers if you live somewhere likely to attract visitors. For example, residents have done so in Edinburgh during the festival and in Wimbledon over tennis fortnight.

Weekday lodgers

If you don't fancy sharing your home all the time, think about letting out a room Monday to Friday. This can be useful for workers in your area who want to avoid a long commute home. As a general rule, 60% of the normal weekly rent is usually appropriate for a weekday lodger.

Deposits

You must use a tenancy deposit protection scheme if you are taking a deposit from a tenant. This protects the tenant's deposit while he or she is renting the property. 

Tops tips for finding a good lodger

Follow these tips to avoid letting your spare room to the wrong person:

• Interviews prospective tenants. Find out how much time they'll spend in the house, how they spend their evenings and weekends and what they do for a living. Make sure you cover the house rules.
• Carry out a tenant check before you agree to take someone into your home. You could try services at the National Landlords Association or Experian. Don't forget there will be a fee.
• Ask your prospective lodger to provide references from their bank or building society and their employer or previous landlord. You could even take a character reference.
• Write up a formal agreement between you and your new lodger. Include the following details:
  • The amount of rent including any share of the household bills
  • When and how the rent is to be paid
  • When the rent will be reviewed
  • The notice period
  • Which rooms or facilities your lodger is entitled to use.
  • Any house rules which you feel are relevant.
  • Ask for a deposit of at least month's rent upfront. You can use this to cover the cost of any unpaid rent or damage to your home.
• Keep a careful record of the rents you receive and any expenses you incur. You must retain these for six years following the tax year end.

You can get plenty more tips and advice from the National Landlords Association.

If you like the idea of sharing your home for extra cash, then go for it. But be careful not to rely on it too heavily. After all, lodgers can leave at short notice and you don't want to be left in the lurch.

More: 7 Ways To Beat Higher Household Bills | How To Attract Top Tenants