HMRC is offering a massively boosted tax-free Personal Allowance of up to £20,070 for households who submit a self-assessment tax return using a fully legal scheme. The standard income tax Personal Allowance is £12,570, but you can boost it by £7,500 with the Rent a Room scheme, bringing the total to £20,070.
Understanding the Personal Allowance
Personal Allowance income tax thresholds have been frozen until at least 2031, marking a full decade without increases. This means more people are dragged into paying more tax as inflation pushes wages up, a phenomenon known as 'fiscal drag'. The standard Personal Allowance is £12,570, with tax rates starting at 20% for earnings between £12,570 and £50,270, then 40% up to £125,140, and 45% above that.
The Rent a Room Scheme
The Rent a Room scheme allows you to earn up to £7,500 tax-free from letting out a furnished room in your home. This allowance applies only to rooms in the property you live in, not buy-to-let properties. You must declare the income on a self-assessment tax return. If you earn less than £7,500, you are exempt from tax on that income. You can also opt out of the scheme if you have losses to offset.
The government explains: '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. You must complete a tax return if you earn more than your threshold.'
By combining the standard Personal Allowance with the Rent a Room allowance, you can enjoy £20,070 tax-free income completely legally.
