The tax-free personal allowance has once again been frozen
The tax-free Personal Allowance has been frozen once more, with its current threshold ceiling in place since 2021 now extended until 2031.
However, people can exploit a little-known provision in this coming tax year, or submit a retrospective claim for the previous tax year, that could increase their tax-free Personal Allowance to as much as £20,070. The Personal Allowance can be boosted to £20,070 through a tax-free income of £7,500 via a particular HMRC programme: the Rent A Room scheme, reports Birmingham Live.
Laura Suter, AJ Bell’s director of personal finance, said: “The government gives a tax break for anyone who rents a room out in their home.
“Lots of homeowners are looking to do this to generate extra money and try to counteract the rising cost of mortgages. You can make up to £7,500 a year tax-free through rent-a-room relief, which will save you up to £1,500 a year as a basic-rate taxpayer or £3,000 a year if you pay income tax at 40%.
“You must be renting out a room (or multiple rooms) in your home, rather than a separate flat, and the room must be furnished. But it’s not limited to a room, you can rent out as much of your home as you like. You can also use it if you run a BandB or guest house, so long as it’s in the same property you live in.
“You don’t even need to own the home to benefit, you could be renting out part of your rental property – however, you’ll need to check that your lease doesn’t prohibit that.
“You don’t have to let the room for a minimum period of time. But be aware that if you own the property jointly with someone and split the income you only get half the relief per person. If you earn less than £7,500 a year from renting out a room you won’t need to fill in a tax return, but if you earn more than the tax-free limit you will.”
The Labour Party government outlines the scheme’s details: “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.”
