Taxpayers can legally increase their tax-free Personal Allowance to £16,320 by using an HMRC scheme and completing a self-assessment tax return for the current tax year. The standard Personal Allowance remains at £12,570, frozen since 2021 and set to stay at that level until at least 2031.
How the rent-a-room scheme works
The boost comes through the rent-a-room scheme, which allows homeowners to earn up to £7,500 tax-free from letting out a furnished room in their main residence. If the income is shared with a partner, each person can claim an additional £3,750, raising their total tax-free allowance to £16,320.
The scheme only applies to rooms let in the property where the owner lives, so it cannot be used for buy-to-let income. Earnings of £7,500 or less (£625 per month) are exempt from tax, provided the income is declared on a self-assessment tax return.
Fiscal drag and frozen thresholds
Tax thresholds have been frozen for five more years, a policy that pushes more people into paying tax for the first time or into higher tax bands as wages rise with inflation, a phenomenon known as 'fiscal drag'. The current plan keeps the Personal Allowance at £12,570 until 2031, despite suggestions from Prime Minister Andy Burnham about increasing thresholds, but no confirmation has been given ahead of next month's Budget.
Income tax rates remain at 20% for earnings between £12,570 and £50,270, 40% for earnings above that, and 45% for every pound over £125,140 for additional rate taxpayers.
Opting out and official guidance
Taxpayers can choose not to use the scheme and instead have rent-a-room income taxed normally, which may be beneficial if a loss is made, for example after refurbishing a room following damage, allowing the loss to be offset against tax on another buy-to-let property.
Official guidance 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."
