The Personal Allowance has been frozen at £12,570 since 2021, but you can earn an additional £7,500 tax-free with HMRC’s rent-a-room scheme by letting out a room in your home
The tax -free Personal Allowance has found itself back in the spotlight lately, after yet another freeze on the threshold that’s remained unchanged since 2021.
The Government has pushed through an extension to the freeze on income tax bands for another three lengthy years and alongside it, the sum you can pocket without paying any tax will stay locked at the same figure throughout that period, despite inflation and rising wages forcing greater numbers of workers into higher earnings brackets and consequently steeper tax demands.
However, workers can exploit a little-known loophole that will catapult their tax-free Personal Allowance right up to £20,070, substantially exceeding the standard £12,570 that’s been frozen rigid since 2021 and will now stay fixed until 2031.
When thresholds are frozen, it results in growing numbers of people being pulled into paying more tax as inflation drives up salaries and pushes additional workers into higher income tax brackets, a phenomenon dubbed ‘fiscal drag’.
This is amongst the key reasons why many Brits are hunting for legitimate methods to enhance their tax allowances in a bid to stretch their money further, whilst surrendering less of their hard-earned cash to HM Revenue and Customs, reports the Express.
The standard income tax Personal Allowance stands at £12,570. That’s the ceiling amount in most situations that you can bring home before you must begin paying tax on your earnings, which starts at 20% for income between £12,570 and £50,270 before leaping to 40% of earnings beyond that threshold.
It then climbs once more to 45% of every pound over £125,140 for additional rate taxpayers. However, there’s a clever way to bump up the Personal Allowance to £20,070 by adding tax-free earnings of £7,500 through a particular HMRC scheme – meaning you can pocket your first £20,070 without paying a single penny in income tax.
This works through the rent-a-room scheme, a completely legitimate tax arrangement approved by HMRC. Letting out a spare bedroom enables you to rake in up to £7,500 from renting space in your home before any tax liability kicks in.
The scheme’s allowance only applies to rooms being rented in your actual residence, so it won’t cover income from buy-to-let properties.
You’ll need to notify HMRC through a self-assessment tax return, and provided you earn £7,500 or below from letting a room (that’s £625 monthly), you’ll be completely exempt from paying any tax whatsoever on those earnings.
This means you can benefit from the £12,570 Personal Allowance whilst stacking an additional £7,500 on top – all entirely above board and tax-free.
You’re free to decline the scheme if you prefer, opting instead to have the rent-a-room earnings taxed in the standard manner. This could prove beneficial if you somehow incurred a loss (perhaps following extensive refurbishment after significant damage), allowing you to offset that loss against tax owed on another buy-to-let investment.
The government states: “The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. The threshold is halved to £3,750 if you share the income with someone else.
“You can let out as much of your home as you want. The tax exemption is automatic if you earn less than your threshold. Which means you do not need to do anything.
“You must complete a tax return if you earn more than your threshold.
“You can then opt into the scheme and claim your tax-free allowance. You do this on your tax return.
“You can choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.”
