HM Revenue & Customs (HMRC) is effectively raising individuals' personal tax-free allowance to an impressive £27,070 by utilising three valuable tax relief opportunities. Financial experts at AJ Bell have outlined how these strategies can significantly increase your tax-free income: the rent-a-room scheme, tax-free childcare, and the savings allowance.
Laura Suter from AJ Bell explains, “The government offers a tax exemption for homeowners who rent out a room in their home. Many are taking advantage of this to offset rising mortgage costs.” Under this scheme, you can earn up to £7,500 annually tax-free from renting a room. This relief can save basic-rate taxpayers up to £1,500 a year, and those in the 40% tax bracket up to £3,000.
Parents can also benefit from the tax-free childcare scheme, which provides up to £2,000 per child each year to cover childcare expenses. The allowance is paid in £500 quarterly increments and requires setting up a dedicated tax-free childcare account. For every £8 contributed by a parent, the government adds £2, which can then be used to pay for nurseries, childminders, or holiday clubs.
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Additionally, individuals can benefit from a tax-free savings allowance of up to £5,000 on interest income. If your annual income from work or pension is £12,570 or less, you can earn up to £5,000 in savings interest without paying tax. This allowance reduces by £1 for every £1 earned above the personal allowance threshold and is completely removed if your income reaches £17,570 or more.
By combining these three allowances, HMRC effectively increases your total personal tax-free income potential to £27,070, helping you keep more of your earnings legally tax-free.