HMRC Personal Tax-Free Allowance is being effectively increased to £20,070 through a specific scheme. While the standard tax-free Personal Allowance remains frozen at its current threshold, which has been in place since 2021 and is set to continue until 2031, individuals can take advantage of a little-known rule to boost their allowance.
How to Increase Your Personal Allowance
By using the Rent a Room scheme, you can earn up to £7,500 tax-free from renting out a furnished room in your home. This can raise your total tax-free Personal Allowance to £20,070. Laura Suter, director of personal finance at AJ Bell, explained: "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%."
Eligibility and Conditions
To qualify, you must rent out a room (or multiple rooms) in your home, not a separate flat, and the room must be furnished. You can rent out as much of your home as you like, and the scheme also applies if you run a B&B or guest house within your own home. You do not need to own the property; tenants can also benefit, provided their lease allows subletting. There is no minimum rental period. If you own the property jointly and split the income, each person gets half the relief. If you earn less than £7,500 per year, you do not need to file a tax return; if you earn more, you must file one.
Government Guidance
The Labour Party 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. 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."
