Tax and VAT for Airbnb Hosts

There is no doubt, Airbnb has revolutionised not just the way people plan their travel but also how property owners choose to rent out their spaces not just in the UK but across more than 190 countries in the world.  Airbnb has grown at an unbelievable rate, attracting users from different countries, age groups and backgrounds with a simple to use platform. Unfortunately, what can be a bit more tricky to understand are the tax responsibilities for the Airbnb hosts renting out accommodation.

We want to demystify Tax and VAT for UK Airbnb hosts to help you:

  • Understand which taxes you need to pay, as well as how much and when;
  • Figure out what reliefs and exemptions are available to you to reduce your tax bill as much as possible;
  • Make you aware of other taxes that may affect you such as VAT or Capital Gains Tax.

How HMRC Classifies UK Airbnb Hosts

No doubt you are renting out your property or room to make some money on your property and this probably means you may need to declare your earnings and pay some tax. However which tax you pay, if at all, depends on what you rent on Airbnb and where it is located.  Here are some common scenarios:

  • You Rent a Room in Your Own Home
  • You Rent a Furnished House or Apartment in the UK
  • You Live in the UK and Rent a Property Overseas 

Renting a Room in Your House on Airbnb

Everyone in the UK is entitled to rent out a furnished room in their own home and collect up to £7,500 tax free each tax year in room rent. A tax year runs from 6 April to 5 April.

This is called the Rent a Room Scheme. The good news is that charge rent of less than £7,500 on letting the room then you do not need to let HMRC know or submit a Personal Tax Return, unless you need to submit one for another reason.

If you collected more than £7,500 in rent then you will need to submit a tax return detailing how much you have made and the tax you need to pay.  There are two methods available to you to work out how much you have earned from renting a room in your house:

METHOD A You can simply declare all the rental income you have received from your lodgers and pay tax on the amounts over and above the £7,500 threshold

METHOD B You can choose to show how much profit you made renting the room.  The profit is the rental income you collect less any expenses you have incurred.  Typical expenses can include insurance, repairs, maintenance, a portion of utility bills and accountants fees.

You can choose each year on your tax return which method suits you because you may find it advantageous to switch between the two depending on how much rent you have collected.  

If you are new to Airbnb but plan to rent out a room in your house on a more regular basis moving forward and expect to earn more than £7,500 it could be worthwhile submitting a personal tax return to record your tax loss in the current year as you can use it against future profits and save tax.

In the first instance, if you are collecting rent of more than £7,500 in the tax year you must inform HMRC so they know to expect a tax return from you.

How Much Tax Will You Pay Under the Rent-a-Room Scheme as an Airbnb Host?

Income tax is calculated at different rates according to how much you earn during a tax year.  For 2017/2018 the rates are:

Personal Allowance Up to £11,500 0%
Basic rate £11,501 to £45,000 20%
Higher rate £45,001 to £150,000 40%
Additional rate over £150,000 45%

So if lets say in the tax year 2017/2018 Sarah earns £45,000 per year in full time employment and collects £10,000 from renting a room in her house and she opts to use method A for calculating her tax. Her tax bill would be £10,700 which is worked out as follows:

£11,500 0% = £0.00

£33,500 20% = £6,700

£10,000 40% = £4,000

Total £10,700

If you paid tax through the payroll system in your part time job, you would be allowed to deduct the total amount of tax you paid from the payable amount of £3,700.  The amount of tax you paid will be on your payslips or P60.

Download our our Tax Estimator HERE

Finally, HMRC has some great guidance on the Rent a Room Scheme where they touch on many details around the scheme including time limits and tax losses.

Next: Renting a Furnished Property in the UK on Airbnb