How You Could Legally Raise Your Tax-Free Allowance to £20,070 with HMRC Rule

Most UK taxpayers know about the £12,570 personal allowance—the amount you can earn tax-free each year. But what if there was a legitimate HMRC rule that could boost that amount by £7,500, raising your total tax-free income to £20,070?

Well, there is—and it’s called the Rent a Room Scheme. While the government has confirmed the freeze on income tax bands until April 2031, this lesser-known tax break can help you make the most of your earnings. Here’s how it works and who can benefit.

Freeze

Back in 2021, Rishi Sunak froze both the personal allowance and the higher-rate threshold. Originally planned to end in 2025/26, the freeze was extended in Autumn 2024 and again in the 2025 Budget, taking it right through to 2030/31.

That means the £12,570 personal allowance and the £50,270 higher-rate threshold won’t increase with inflation for seven more years. While the tax rates (20%, 40%, and 45%) haven’t changed, this freeze creates what’s known as fiscal drag—as wages rise, more people are pushed into higher tax brackets, even if their purchasing power doesn’t increase.

Drag

Fiscal drag is sneaky. You get a pay rise, but because tax thresholds are frozen, you end up paying more tax—even if your real earnings (after inflation) haven’t gone up. It’s a quiet way for the government to collect more tax without raising rates.

So how can you fight back? That’s where the Rent a Room Scheme comes in.

Boost

Under this HMRC scheme, you can earn up to £7,500 tax-free per year by renting out a furnished room in your own home. That’s in addition to your personal allowance of £12,570, bringing your total tax-free income to £20,070.

Here’s a breakdown:

Source of Tax-Free Income	Amount
Personal Allowance	£12,570
Rent a Room Scheme (max)	£7,500
Total Potential Tax-Free	£20,070

This can be a huge help in reducing your tax burden, especially during a long period of frozen allowances.

How

To qualify, the room must be:

• Furnished
• In your main residence (not a buy-to-let)
• Rented to a lodger, not a separate property

If you earn £7,500 or less from renting out the room, the tax exemption is automatic—you don’t need to do anything. You only need to submit a tax return if your rent income exceeds the threshold.

If you earn more than £7,500, you’ll need to:

1. Declare the income on your Self-Assessment tax return
2. Opt into the scheme to claim your tax-free allowance
3. Or, opt out and pay tax on profit after deducting expenses (useful if you make a loss)

If you share the rental income with someone else (e.g. a partner or co-owner), the tax-free limit is halved to £3,750 each.

Example

Let’s say you rent out a spare room for £625 per month—exactly £7,500 a year. You’d pay zero tax on that income under the Rent a Room Scheme, even if you’re also earning up to £12,570 through employment or a pension.

That’s an extra £625 a month tax-free, which could go toward energy bills, mortgage payments, or just easing the cost of living pressure.

Rules

There are some things to be aware of:

• You can’t use this allowance for buy-to-let properties
• The room must be part of your main home
• The space must be furnished
• If you rent to more than one lodger, total income is still capped at £7,500 for full exemption
• If income is over the limit, you must report it and choose how to be taxed

You can still claim expenses if you choose not to use the allowance and instead file your actual income and expenses.

Action

To get started:

• If you’re earning below £7,500 from a lodger, you don’t need to do anything
• If you’re earning over £7,500, submit a Self-Assessment tax return
• When completing the return, you can choose to opt into the scheme to claim the tax-free amount

It’s a great way to make extra income and legally increase your tax-free allowance without breaking a sweat.

FAQs