The Personal Allowance remains frozen at £12,570, but people who rent out a room could benefit from up to £7,500 additional tax-free income under HMRC’s rent-a-room scheme — bringing total tax-free income to £20,070
HMRC has increased the tax-free allowance(Image: Getty)
The new tax year is only a few months in, and with it comes a reset of various limits and allowances, which can be earned anew. For budget-conscious households, every penny counts for another 12-month period.
The tax-free Personal Allowance has been frozen once more by the Government, with the current cap on the threshold since 2021 now set to extend all the way to 2031, a full decade without any increases to keep up with inflation.
However, individuals can take advantage of a completely legal and hitherto little-known rule this coming tax year, or backdate a claim for the last tax year that will boost their tax-free Personal Allowance all the way up to £20,070 for the tax year, far exceeding the standard £12,570.
When bands are frozen, an increasing number of people will find themselves paying more tax as inflation drives wages up and pushes more workers into higher income tax brackets, a phenomenon known as “fiscal drag”.
This is one of the reasons why many people are seeking ways to legally increase their tax allowances in an effort to stretch their money further, and lose less of their income to the taxman – or at least, as little as they legally can, reports the Express.
Of course, you have the option to opt out of the scheme and decide to have the rent-a-room income taxed in the usual way. This could be a viable option if you somehow incurred a loss from this venture (perhaps due to having to refurbish the entire room after significant damage), and you wish to offset this loss against your tax liability on another buy-to-let property.
The government clarifies: “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.”
