Britons could legally increase their tax-free income to £20,070 by taking advantage of an HMRC-backed scheme.
With the Personal Allowance frozen at £12,570 until 2031, some taxpayers are exploring ways to reduce their tax liability.
One option is the Government’s rent-a-room scheme, which allows homeowners and tenants to earn up to £7,500 per year tax-free by letting furnished accommodation within their main residence.
Combined with the standard Personal Allowance, this means individuals could receive up to £20,070 in income without paying tax.
The scheme applies only to furnished rooms within a person’s primary home and cannot be used for separate buy-to-let properties.
It is available to both homeowners and renters, although tenants should check their lease agreements before subletting.
If rental income does not exceed £7,500 per year, the exemption applies automatically and no tax is due.
This equates to around £625 per month in tax-free rental income.
HMRC rent a room scheme explained as Britons can earn £20,070 tax-free
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Those earning above the threshold must complete a self-assessment tax return and opt into the scheme to receive the tax relief.
Taxpayers also have the option to opt out and instead declare rental income and expenses through standard property income reporting.
Laura Suter, director of personal finance at AJ Bell, said: “The government gives a tax break for anyone who rents a room out in their home, and lots of homeowners are looking to do this to generate extra money and try to counteract rising mortgage costs.”
She added: “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 per cent.”
Tax Burden as a percentage of GDP | GETTY
The scheme is not limited to a single room, and can also apply to those running a bed and breakfast or guest house within their home.
However, if a property is jointly owned and rental income is shared, the tax-free threshold is reduced.
Each individual would receive a maximum allowance of £3,750.
Labour said: “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, and the threshold is halved to £3,750 if you share the income with someone else.”
The policy provides flexibility for those seeking additional income while remaining within tax rules.