The Personal Allowance has been frozen once more, with the current threshold cap—in place since 2021—now extended until 2031. However, people can exploit a little-known provision in the upcoming tax year, or submit a backdated claim for the previous year, which could increase their tax-free Personal Allowance to as much as £20,070.
How to Boost Your Tax-Free Allowance
The Personal Allowance can be boosted to £20,070 through tax-free income of £7,500 via a particular HMRC initiative: 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."
Key Details of the Rent a Room Scheme
- You can earn up to £7,500 per year tax-free through rent-a-room relief.
- This saves 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, not a separate flat, and the room must be furnished.
- You can also use it if you run a B&B 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—but check your lease.
Important Considerations
You don't have to let the room for a minimum period of time. However, 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.
Government Guidance
The Labour Party 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, meaning 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 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."
