The standard income tax Personal Allowance is £12,570, but you can increase it up to £20,070 with tax-free earnings of £7,500 through a specific HMRC scheme. Here’s how to claim
HMRC is offering a significant boost to the tax-free Personal Allowance, raising it to £20,070 for households who submit a self-assessment tax return under one specific circumstance. This comes as a welcome relief, especially since the Personal Allowance Income Tax thresholds have been frozen since 2021 and will remain so until at least 2028.
To make matters worse, there’s a possibility that Labour could extend this freeze even further. When bands are frozen, more people end up paying higher taxes as inflation pushes wages up, causing more workers to move into higher income tax bands – a situation known as ‘fiscal drag’.
This is why many individuals are looking for legal ways to increase their tax allowances in an effort to stretch their money further and lose less of their income to the taxman. The standard income tax Personal Allowance is £12,570.
This is the maximum amount you can earn in most circumstances before you start paying tax on your income, which begins at 20% for earnings between £12,570 and £50,270 and then rises to 40% of earnings over that amount. It then increases again to 45% of every £1 over £125,140 for additional rate taxpayers.
However, you can boost the Personal Allowance up to £20,070 with tax-free earnings of £7,500 through a particular HMRC programme, reports Chronicle Live. This is achievable via the rent-a-room scheme, reports the Express.
Letting out a room enables you to earn up to £7,500 from renting a bedroom in your property before the income becomes subject to tax.
The scheme’s allowance only applies to rooms let in your main residence, so it cannot be used to offset buy-to-let income.
You must report this to HMRC as part of a self-assessment tax return, and if your earnings from letting out a room are less than £7,500 (£625 per month), you will be exempt from paying any tax on this income.
This enables you to benefit from the £12,570 Personal Allowance and an additional £7,500 without paying income tax on any of it, entirely within the law.
Naturally, you have the choice to opt out of the scheme and select to have the rent-a-room income taxed normally.
This might be advantageous if you somehow sustained a loss from this (perhaps due to extensive renovation after significant damage), and you wish to offset the loss against your tax liability on another buy-to-let property.
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. 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.”
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