Coffee and a chat

A chance meeting with Homeless Link boss Jenny Edwards last week (during which I managed, inadvertently, to drink her entire cup of coffee though that’s another story) produced an interesting idea.

Our chat about the impending cuts had turned somewhat gloomy, Jenny describing the prep work the organisations she represents are doing to try and minimise the number of people who will find themselves homeless as a result of the impending cuts. ‘You want somewhere that’s higher than they would otherwise fall and then they can get back on track again,’ mused Jenny.

And then she hit upon the big idea.

The incentive for people to let accommodation in their home through the government’s rent-a-room scheme, she said, has not improved since 1997.  Indeed, it’s 13 years since the annual amount people can earn tax-free by letting out a room in their home increased from £3,250 to £4,250.

I nodded along as Jenny reeled off the benefits of upping that limit to entice more people into the scheme, which is open to homeowners and renters: additional income for hard-up households which might otherwise have to move to cheaper accommodation; a way to expand the private rented sector; a flexible option for those in need of a home; and a way to tackle under occupation. Surely, argued Jenny, it’s time for another hike in the tax-free allowance?

Might not a chancellor hell-bent on paying off an £83 billion debt beg to differ, I ventured. ‘If people are doing it they’re probably not telling the revenue anyway,’ reckoned Jenny. ‘So why not send a strong signal by increasing the tax-free limit? How much income is the taxman getting from people renting out rooms in their homes anyway?’

Good question, and one HM Revenue and Customs doesn’t have a straight answer for. ‘We do not have complete data on the rent a room scheme,’ a HMRC spokesperson informs me. This is because those whose rent receipts from letting a room in their home don’t exceed the tax limit aren’t obliged to declare the income (unless they are filling in a self-assessment tax form anyway).

The more pertinent question, then, is how much increasing the current tax-free limit would cost the Treasury. Using its imperfect data, HMRC estimates there are about 130,000 people renting out rooms in their homes. If all of them uses their full tax-free allowance that represents about £0.5 billion of untaxed income a year.

Say the government upped the tax-free allowance by 31 per cent, the same increase that was applied in 1997. Households could receive up to £5,567.50 untaxed, giving them room to charge as much as £107 a week without having to hand anything over to the exchequer. This would leave the public purse around £85 million a year worse-off than under the current threshold - assuming all 130,000 households receive at least £5,567.50 in rent and pay the UK’s top, 50 per cent tax rate. But of course this is a worst-case, and highly unlikely scenario.

Suppose instead all those households still use their maximum allowance, but are lower-rate taxpayers. The cost to the Treasury then more than halves to around £34 million. In reality of course, the cost would likely be far lower. As our friend at the tax office indicates, many rent-a-roomers already charge too little to be taxed anyway. And as Jenny pointed out, who knows how many are dodging the taxman anyway.

Some might contend that increasing the limit could leave lodgers facing higher rents. It is hard to see how this argument applies to anywhere other than a handful of prime locations. I’m more convinced by Jenny’s line. Up the limit, and there’s a chance those who find themselves facing housing difficulties will have less far to fall.