The tax-free Personal Allowance has been frozen at £12,570 since 2021 and is set to remain at that level until 2031, a decade without inflationary increases. This freeze, known as 'fiscal drag', means more people are being pushed into higher tax bands as wages rise. However, a little-known HMRC rule allows individuals to legally boost their tax-free allowance to £20,070 for the current tax year, or backdate a claim for the previous year.
The increase is achieved through the Rent a Room scheme, which lets homeowners earn up to £7,500 tax-free by renting out a furnished room in their main home. Combined with the standard Personal Allowance of £12,570, this means the first £20,070 of income can be earned without paying income tax. Laura Suter, director of personal finance at AJ Bell, explained that the scheme can save basic-rate taxpayers up to £1,500 a year and higher-rate taxpayers up to £3,000 a year.
To qualify, the room must be in the property where the homeowner lives, and it must be furnished. The scheme is not limited to a single room; homeowners can rent out multiple rooms or even run a bed and breakfast from their home. Renters can also benefit if their lease allows subletting. If the rental income is £7,500 or less (£625 per month), no tax return is needed, but earnings above that threshold must be declared via self-assessment.
Individuals can opt out of the scheme if they make a loss on the rental, allowing them to offset losses against other property income. The 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.' This fully legal tax vehicle offers a way to mitigate the impact of frozen allowances and rising costs.
