There are a number of HMRC tax breaks
HMRC offers several lesser-known tax breaks that could entitle households to up to £16,000 tax-free, effectively increasing their disposable income by reducing the amount of tax they owe. These tax reliefs come with their own set of criteria and claiming methods, but none demand a hefty salary or advice from financial experts.
Most of the claiming process can be done online, with comprehensive details about these schemes accessible on Gov.uk. Some underused tax breaks include Marriage Allowance worth £1,260, Trading Allowance worth £1,000, the Rent-a-Room Scheme worth £7,500, Tax-free Childcare, worth £2,000 per child, and the Tax-free Savings Allowance worth £5,000.
Laura Suter, director of personal finance at AJ Bell, told Birmingham Live: “These five simple tax tips don’t require you to have a six-figure salary or a team of advisers on speed dial. They’re well within reach for the average household and are fully sanctioned by HMRC, so there’s no need to feel like you’re gaming the system.
“You can backdate any claims for up to four years, assuming you were eligible in those years, which would get you a total of £1,260, including the current year’s claim. If you earn more than £1,000 from your side hustle in a tax year, you’ll still benefit from the tax break, but you’ll need to fill out a tax return to declare the extra income and pay any relevant tax.”
Marriage Allowance
Marriage Allowance, also extended to civil partners, allows people to transfer as much as £1,260 of their personal allowance to their spouse. This can lead to a reduction in the annual tax bill for the household by £252.
To take advantage of the Marriage Allowance scheme, one partner must be a basic rate taxpayer and the other must earn less than the personal allowance, typically £12,570 annually. It’s the lower-earning partner who needs to apply for the Marriage Allowance.
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For those with trading income, including self-employment or renting out personal equipment, there’s a chance to pocket up to £1,000 each year without paying tax on it. Suter recommends: “Just make sure you keep track of any relevant paperwork proving your income.”
Rent-a-Room
The Rent-a-Room Scheme is another tax-efficient option, allowing you to earn up to £7,500 a year tax-free by letting out a furnished room in your house. There are no restrictions on how much of your home you can let or for how long.
However, you must be a resident landlord or operate a bed and breakfast or guest house to qualify. If your property is divided into separate flats, this scheme isn’t for you.
Suter points out: “Be aware that if you own the property jointly with someone and split the income, you only get half the relief per person.”
Tax-free Childcare
Tax-free Childcare is available alongside free childcare for those who are eligible for both. The scheme provides an online account for each child, and for every £8 you deposit for your childcare provider, the government will contribute £2.
It can offer up to £2,000 a year per child or up to £4,000 a year if your child is disabled. There are various eligibility criteria depending on your household circumstances, which can be found on gov.uk..
Tax-free Savings Allowance
In addition to a personal allowance, workers receive a tax-free savings allowance each year, based on their earnings. If you earn £17,570 or less, you could qualify for the starting rate, which allows you to earn up to £5,000 in interest before having to pay tax on it.
This allowance gradually decreases as your income rises. Individuals earning £125,140 or more per year won’t be eligible for any personal savings allowance.
Suter offered an additional tip for this tax break: “This trick is particularly handy for couples where one has a low income, but as a household, they have a decent amount in savings. If you transfer the bulk of the savings to the lower-earning half of the couple, you can maximise the tax-free limit.”