State pensioners can increase their tax-free Personal Allowance to £21,330 by using two little-known but fully legal HMRC rules at the same time, if eligible. The income tax Personal Allowance remains frozen at £12,570, and while Prime Minister Andy Burnham has promised to 'look at' the issue, he has declined to commit to an increase, leaving it frozen until at least 2031 unless the next Budget changes course.
Current threshold and state pension
After the most recent Budget in November, former Chancellor Rachel Reeves confirmed that state pensioners who receive no other income apart from the state pension will be exempt from paying income tax if they exceed the threshold, which is due to happen in April 2027 following another triple lock increase. Mr Burnham and his new Chancellor John Healey have publicly confirmed they will keep this rule in place.
However, many pensioners will still be liable to pay tax on their pension and other earnings because they don't rely solely on the state pension, such as those still in work or who have a private pension, annuity income, or savings. The state pension has always been taxable, but those earning less than £12,570 never had to worry about it. With the state pension just £22 away from the threshold this tax year, many who earn other income will exceed it and, because they have other earnings, will not be exempt.
Marriage Allowance and Rent-a-Room
Two key HMRC allowances can help: the Marriage Allowance and the Rent-a-Room scheme. Married couples can boost their Personal Allowance by 10% thanks to Marriage Allowance. One partner must be a non-taxpayer (earning under £12,570) and the other a 20% taxpayer (earning above it). The non-taxpayer transfers 10% of their allowance to their partner, boosting the recipient's tax-free allowance by £1,260 to £13,830. It saves approximately £252 in a single tax year and can be backdated for four more years, paid by cheque.
HMRC's explanation via gov.uk says: “Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. Your Personal Allowance is the amount you can earn before paying tax. This reduces their tax by up to £252 in the tax year (6 April to 5 April the next year).” HMRC also stresses that it 'will not affect your application for Marriage Allowance if you or your partner are currently receiving a pension'.
Secondly, the Rent-a-Room scheme allows you to earn up to £7,500 with no tax on the earnings, provided the room is in the property you live in. You must declare it to HMRC via a self-assessment tax return, and if you earn £7,500 or less from renting out a room (£625 per month), you are exempt from paying tax on that income.
Combining both allowances
By combining the £12,570 Personal Allowance with the £7,500 Rent-a-Room allowance, you could boost your tax-free allowance to £21,330, completely legally. To claim, you need to fill out a tax return.
