The UK’s HMRC is offering an enhanced Personal Allowance of up to £20,070 ($27,388.7) for individuals who take advantage of the rent-a-room scheme as part of their self-assessment tax return.
This comes as a response to the freeze on Personal Allowance income tax thresholds, which are set to remain unchanged until at least 2028, reported the Express.
The standard income tax Personal Allowance is currently £12,570, which is the amount one can earn before being liable for income tax.
With the thresholds frozen, more individuals are expected to fall into higher tax brackets due to inflation, a situation known as ‘fiscal drag’.
Consequently, there is a growing interest in legal avenues to increase tax allowances.
The rent-a-room scheme permits taxpayers to earn up to £7,500 tax-free from renting out a furnished room in their home. This is in addition to the standard Personal Allowance, potentially raising the threshold to £20,070.
The scheme aims to assist taxpayers in stretching their finances further amidst the fiscal drag.
However, the additional allowance under the scheme is only applicable to income from a room rented out in the taxpayer’s main residence, not buy-to-let properties.
Taxpayers must declare this income to HMRC via a self-assessment tax return. If the income from the rented room is below £7,500 (or £625 per month), it is exempt from tax.
By leveraging the rent-a-room scheme, taxpayers can enjoy the standard Personal Allowance plus an extra £7,500 without incurring income tax on this amount.
Taxpayers also have the option to opt out of the scheme and have their rent-a-room income taxed in the usual way.
This could be advantageous in certain situations, such as when a loss is incurred from renting the room, allowing the individual to offset this loss against their tax liability on another property, stated the report.
“HMRC’s rent-a-room scheme allows higher personal tax allowance” was originally created and published by The Accountant, a GlobalData owned brand.
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