Extra income - tax implications?

'Rent-a-room' scheme is completely separate from any other kind of earnings. If the money you make from your new TESOL venture comes to more than 4,250 pa, the rest will be taxed at your wife's marginal rate with no deduction for expenses. Tax Office will probably regard your venture as self-employment (running a business), rather than Rent-a-room scheme. You can then work out the full expenses such as extra heating and lighting, insurance, cost of replacing carpet and furniture, depreciation, cost of food, teaching books etc and deduct from your fees income. Tax will be charged at your wife's marginal rate. She may also be liable for Class 4 NI, which is just another form of tax as it doesn't earn any entitlement to benefits.

Alec

The tax implications are easy to understand, but are you quite sure the nature of the accommodation you provide qualifies as falling within the rent-a-room scheme? I have a feeling the scheme is designed for long-ish term tenants who live as part of the family (i.e. share most meals with them), and not for short-termers only staying a short while.

What you're doing looks closer to running a B&B-type business, and if that is the position, then all the income from that (less expenses, of course) would be taxable as self-employment.

No way. If I understand what you're asking correctly, you are suggesting that if, for example, the accommodation income came to £2k, and the actual teaching fees were to come to an extra £3k, then this would count as £4250 exempt plus £750 taxable. That would certainly not be the case.

The whole £3k would be taxable as self-employment income. You cannot use any of the RaR allowance against any income other than from renting rooms.

It would be stretching a point beyond what's reasonable if you were to suggest that the teaching is just an incidental benefit thrown in as part of the accommodation.

Well thanks for the help - we haven't received any paperwork yet about it, but I'm wondering if my wife has to go self-employed, then who decides what portions of the payment goes towards which venture - ie my wife could say that she's only charging 10% of the income to the TESOL part, the remaining

90% is just unrelated as RaR income. Who's to know! And what about me - surely I'm inconvenienced ie its in my house too and therefore need paying! as part of the venture ie through RaR. Surely my wife shouldn't be taxed on the whole amount for something that isn't entirely one venture (ie one venture is tax free up to c4k and the other is entirely taxable!).

This may be the only way to get the most out of it if you really have to submit the whole income as self-employed TESOL only income. I suppose its one of those grey areas, but I'd rather play it straight down the middle to avoid any future repurcussions.

Thanks.

Most of our current students stay 2-4 weeks at a time and we have been informed by the school that this falls within the RaR scheme. And yes, they do live as part of the family, sharing most meals too. This new scheme we're interested in differs only on one aspect and that is to teach the children

15 hours of english a week in the home in addition to the normal living as part of the family stuff.

OK, that seems realistic. Thanks.

Its not incidental, but from our point of view it boils down to 3 hours of work a day during the week - which is bugger all in comparison to the RaR full board side (food preparation, washing up, clothes washing, making sure they come back at a reasonable time at night, etc). The taxman's such a miserly git.

So are your lodgers, by the sound of it. Surely, if they're living as "part of the family", they will do their share of chores too! :-)

Don't forget to look into the possible requiremt for council agreement for 'change of use' of the house, and the possible capital gains tax liability, if the house is used partly as a language school.

Robert

Isn't this all a bit overkill for carrying on with what we are doing currently (and tax free for up to c4k) with an additional 15 hours per week teaching 1 or 2 kids for a few weeks!?

You or your wife does. If the tax inspector isn't happy about the apportionment, they will query it. What they will do is to compare your return with someone in a similar position, and if your computation is way out of line, they will tell you what is reasonable. You can challenge it if you have receipts to back up your story (which you are obliged to keep for 7 years). You can ask your tax office for advice, or an accountant - or there may be someone in similar position who has successfully negotiated with their tax office. If your wife has no other source of income, it's usually preferable for her to run the business as sole trader. You are allowed to arrange the tax affairs between you to pay the least amount legally permitted. You can run it as a partner - but normally there is no tax advantage as allowances such as R-a-R are simply halved for each of you. If you pay tax at higher rate, your self-employment will be taxed also at your marginal rate. Otherwise your wife will simply pay at standard rate after 2,090 (10%) above 4,895 personal allowance (plus possibly Class 4 NI at 8% above 4,895).

Alec

Yes, but what "the least amount legally permitted" is will be open to never ending argument and debate with the IR, this is what much of the problems with IR35 and paragraph 660 have been caused by. It is very nearly impossible to decide what rules apply in any particular case particularly in the self-employed/small business sort of area.