/ Innovative Finance ISA (IF ISA)

How taking in a lodger can kick start your savings

Got a spare room? Fancy some company? Taking in a lodger gives you the chance to earn some tax-free cash to kick-start your savings.
The Government’s Rent A Room lets you earn up to £7,500 a year tax-free by letting a furnished room in your main home to a lodger.
The scheme’s open to both owner-occupiers and tenants who have spare space and their landlord’s permission to sublet a room. To qualify for the Rent A Room tax relief, you must live in the property with the lodger, at least part of the time.
But what should you do with the extra income?

Open an easyMoney innovative finance ISA
Investing your rental income from a lodger in an easyMoney innovative finance (IF) ISA means further tax advantages. Not only are you not paying tax on the rental income, but if you invest the money in an ISA your money can grow tax-free too.
The easyMoney IF ISA has an annualised target return of 7.28% and all lending is secured by UK property, giving you peace of mind. You can invest up to £20,000 a year and you can ask to withdraw your money at any time.

The pros and cons of overpaying your mortgage
Many homeowners letting a room to a lodger will use the money to overpay on their mortgage. Paying off some of your mortgage early will save money on your overall interest bill.
But although paying down your mortgage can seem like a good plan, it has its downsides too. Mortgage rates are cheap at the moment – you can fix for two years at about 1.4% – so your mortgage might not be costing you much. Although it’s more risky, you’d be better off investing your money – you can invest up to £20,000 in ISAs each year. The amount of risk varies from ISA to ISA but investments held in an easyMoney IFA ISA are secured against UK property.

Should you save your rental income in cash?
Everyone should aim to have a pot of money saved in cash for emergencies – about six months’ salary is normally enough. An easy access savings account will be risk-free and you can always withdraw your money when you need it.
But with interest rates low, and inflation high, it’s tough to find a cash savings account which beats inflation and actually makes you money. If your savings are eroded by inflation, you’ll effectively lose money over the long-term.
For this reason, once you have adequate cash savings, it’s a shrewd move to make the move to investing. Investing your rental income in the stock market or innovative finance will hopefully generate returns that beat inflation.

What about paying into a pension?
Pensions are a great way to save for retirement. Tax relief is paid on your pension contributions at the highest rate of income tax you pay.
This means if you’re a basic-rate taxpayer and were to contribute £100 into your pension, it would actually only cost you £80. The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary.
However, pensions come with a major downside: You can’t access the money penalty-free until you’re 55. So if you think you might need the money before then, an IF ISA would be a better home for your money.

You can open an easyMoney IF ISA at easymoney.com or by calling 020 3858 7269. You can either start from scratch or transfer from other stocks and shares of cash ISAs. The minimum investment is £1,000. Remember, as with all investing, your capital is at risk. All investors receive an easyMoney Plus card offering discounts at more than 100 of the UK’s biggest retailers.