How to make an extra £4,250 per year!

If you're struggling to pay the bills and have a spare room, you could be making money from it. But there are things to watch out for - here's how to avoid some of the potential pitfalls.

Household budgets are being stretched beyond belief with bills, food and other everyday expenses increasing in price while for most of us, our salaries remain at a standstill. Redundancies are rife and many are struggling to meet their mortgage payments. Doesn't sound good, does it?

Boost your income

So how can we boost those coffers? Well, you can budget. You could take on a second job. Or, if you have a spare room, a seemingly painless way of increasing your household's finances is by taking in a lodger.

Rent a Room scheme

The government had this great idea, you see. Called the "Rent a Room" scheme, we can essentially let out a room in our home to a lodger. And in the 2009/10, tax year you can receive the first £4250, tax-free.

So if you charged your lodger £81.73, or less per week (£354 per month) you wouldn't have to pay the tax man a penny. Plus, if you don't normally fill out a tax return (and don't breach the threshold) you may not need to do a return now.

You don't even need to be a homeowner

Homeowners should check with their lender and home insurer that it is OK to take in a lodger before doing so. And interestingly, you don't even need to own your home to rent a room out (if you are renting you must check whether your lease allows you to rent a room out before doing so).

If two of you share a home (and there was enough space) you could each rent out a room according to the scheme - although you would only be entitled to half the tax-free allowance each (£2,125).

Caveats

Of course, there are a few caveats.

To qualify, the room (or floor) you rent out must be in your main family home (the scheme does not apply if your home has been converted into separate flats that you rent out). It must also be furnished and cooking facilities and a bathroom will need to be shared, so you should think carefully before signing up.

But it certainly all sounds very straightforward, and a relatively easy way to make some extra money. And if you find yourself getting on well with your lodger it can be a rewarding situation all round.

For example, foreign language students often prefer to lodge with a family rather than rent - they get the benefit of family life when far from home, and the family can benefit from a housemate from a different culture. And an added bonus might be that you all start to learn your lodger's language, too!

But is Rent a Room the best option?

But while it sounds great, depending on how much money you make from letting it might not be the best option for you.

For a start, you can't claim any expenses related to the letting, such as wear and tear and heating and lighting, while in the scheme.

And if you plan to provide your lodger with meals, or a laundry/cleaning service, for example, you should note that you'll be taxed on anything you make over the £4,250.

Depending on what you're offering you may therefore find it's better for you to opt out of the scheme, declaring the letting income and claiming expenses.

Essentially, you need to work out:

 - How much income you are left with after your expenses

 - The amount of your receipts (rent plus any income from laundry services, meals etc) over £4,250 or £2,125 if letting jointly (2009-2010 tax year.)

If you opt out of the scheme (or simply do nothing) you will pay income tax on the first amount. If you opt into the scheme you will pay tax on the second amount.

So what should you do if you fancy taking in a lodger?

- Firstly, check with your lender or your lease to ensure you can take on a lodger.

- Call your insurer to inform them too (you may find your premiums will go up). You may also wish to ask your lodger if he can take out his own insurance for his possessions.

- Ask for referenced, both personal and from your potential lodger's bank. You may also wish to contact his employer.

- Carry out a credit check (which can be done for around £16).

- Work out how much rent to charge. If you will exceed the tax-free £4,250 limit, it may be better to opt out of the scheme and deduct lettings expenses from your tax bill.

- You may wish to specify a trial period, so that the tenancy can be terminated immediately, should it not work out.

- You could even include details of boundaries (rooms off-limits etc.) and rules of the house to ensure the arrangement is clear to all parties concerned in case of problems.

- Draw up an agreement with your lodger stating how long he will stay, how much rent is payable and the amount of notice that must be given on either side to end the tenancy.

Taking on a lodger can therefore be an astute move, both financially and personally - apart from the extra cash you could end up with a friend for life.

But always be aware that above all it is a financial arrangement - and that you're essentially inviting a stranger into your home. Check out potential lodgers carefully, ensure they can pay their rent and get an agreement drawn up so everyone knows where they stand.

And all going well you'll hopefully end up painlessly making some money on a room you weren't really using anyway.

Happy letting!

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