Tax-free Personal Allowance rises to £20,070 from April using HMRC rule | Personal Finance | Finance
HMRC has increased the tax-free personal allowance (Image: Getty)
A new tax year begins on Monday, April 6 and with it comes a reset of various limits and allowances which can be earned again – and for savvy households, maxed out – for another 12-month period. The tax-free Personal Allowance has been sadly frozen again, with its current freeze on the threshold since 2021 now due to extend all the way to 2031, a full decade without any rises for inflation.
But people can take advantage of a little-known rule this coming tax year, or backdate a claim for it for the tax year ending at midnight tonight that will boost their tax-free Personal Allowance all the way up to £20,070 for the tax year, far beyond the normal £12,570 that’s been frozen since 2021 and will now remain stuck in place until 2031.
When bands are frozen, it means more and more people are going to be dragged into paying more tax as inflation pushes wages up and causes more workers to move into higher income tax bands, a phenomenon known as ‘fiscal drag’.
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That is one of the reasons many people are looking for ways to legally boost their tax allowances to try to make their money go further, and lose less of their income to the taxman.
The standard income tax Personal Allowance is £12,570 and it will be held at that level again in 2026-2027. That’s the maximum amount in most circumstances that you can earn before you have to start paying tax on your income, which begins at 20% for earnings between £12,570 and £50,270 and then jumps to 40% of earnings over that amount. It then increases once more to 45% of every £1 over £125,140 for additional rate taxpayers.
But you can boost the Personal Allowance up to £20,070 with tax-free earnings of £7,500 with a specific HMRC scheme, which means you earn your first £20,070 without owing a penny of income tax on it. This is due to the rent-a-room scheme, a fully legal tax vehicle recognised by HMRC.
Renting a room out allows you to earn up to £7,500 from letting out a bedroom in your home before the earnings are taxable.
Laura Suter, AJ Bell’s director of personal finance, explains: “The government gives a tax break for anyone who rents a room out in their home. Lots of homeowners are looking to do this to generate extra money and try to counteract the rising cost of mortgages. You can make up to £7,500 a year tax-free through rent-a-room relief, which will save you up to £1,500 a year as a basic-rate taxpayer or £3,000 a year if you pay income tax at 40%.
“You must be renting out a room (or multiple rooms) in your home, rather than a separate flat, and the room must be furnished. But it’s not limited to a room, you can rent out as much of your home as you like. You can also use it if you run a B&B or guest house, so long as it’s in the same property you live in. You don’t even need to own the home to benefit, you could be renting out part of your rental property – however, you’ll need to check that your lease doesn’t prohibit that.
“You don’t have to let the room for a minimum period of time. But be aware that if you own the property jointly with someone and split the income you only get half the relief per person. If you earn less than £7,500 a year from renting out a room you won’t need to fill in a tax return, but if you earn more than the tax-free limit you will.”
The scheme’s allowance can only be applied to rooms being let in the property you live in, so you can’t use it to cover buy-to-let income.
You have to declare it to HMRC as part of a self-assessment tax return, and if you earn £7,500 or less from renting out a room (£625 per month), then you will be exempt from paying any tax on that income.
In this way you can enjoy the £12,570 Personal Allowance and add another £7,500 on top without paying income tax on any of it, completely legally.
You can, of course, opt out of the scheme, and choose to have the rent-a-room income taxed normally. This might work out if you somehow made a loss from doing this (perhaps you had to refurb the whole room after extensive damage), and you want to offset the loss against your tax burden on another buy-to-let property.
The governent 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.”
