- Households can bring in over £16,000 In tax-free income using these tax breaks
- Couples where one is a non-taxpayer can benefit from full marriage allowance and £5,000 tax-free interest on cash savings
- Rent-a-room and trading allowance offer up to £8,500 tax-free income
- Tax-free childcare remains underused, despite 20% subsidy available to working parents
Families could boost their income by more than £16,000 without sharing a penny of it with the taxman, using five simple tax hacks available to normal households.
Couples with one partner earning less than the personal allowance can benefit from the marriage allowance, while those earning less than £17,570 can benefit from up to £5,000 in tax-free savings income, thanks to the ‘starting rate’ on savings – which is far more generous than the £1,000 tax-free Personal Savings Allowance offered to basic-rate taxpayers.
Meanwhile, tax-free childcare is still under-claimed by working parents and can provide a 20% subsidy on childcare costs, giving up to £2,000 per year, per child.
And those households looking for a side-hustle to boost their income could look into renting a room to bring in up to £7,500 tax-free, or using the trading allowance to net £1,000 of income without paying tax through things like eBay selling.
AJ Bell head of personal finance, Laura Suter, explains how the tax hacks work:
“Lots of people are paying more tax, thanks to frozen or reduced tax allowances brought in by the current Government. But many households are missing out on entirely legitimate ways to bring in tax-free income. All you need to do is take some time to understand how the tax system works and what you’re entitled to.
“These five tax hacks can be used by normal households – you don’t need to be earning hundreds of thousands of pounds and employing an accountant to take advantage. Nor is there any need to feel like you’re doing something underhand or not paying the tax you owe, because these tax breaks are deliberately designed to by HMRC to help people boost their income. It’s a useful reminder to couples to check they are splitting their finances in the most tax-efficient way too.
“One way to amplify the benefit of these tax breaks is to stash your new-found savings into a cash or investment account, meaning that the tax saved today will grow to provide a rainy-day fund in the future or provide a pot of money for your next house move or holiday.”
- Marriage allowance - £1,256
“The marriage allowance is a great way to claim some money back if one half of the couple earns less than £50,270 a year and the other either earns less than £12,570 or doesn’t earn any money at all. The Government lets those who are married or in a civil partnerships share their tax-free earnings allowance each year. It means that if one of you hasn’t used up your Personal Allowance of £12,570 a year you can hand it over to you partner. That could save you up to £252 in the current tax year.
“But what’s even better is that you can backdate any claims for up to four years, assuming you were eligible in those years – which would get you a total of £1,256. You can claim it online directly through the Government, you’ll just need yours and your partner’s National Insurance numbers plus some forms of ID. Bur beware of scam websites that are mocked up to look like the Government website but are actually imposters.”
- Trading allowance - £1,000
“Everyone can earn up to £1,000 tax free from side hustles or other money-making endeavours that are separate from their main job. The so-called ‘trading allowance’ means that if you earn £1,000 from property or trading income it will be tax free – if you’re a basic-rate taxpayer this will save you up to £200 a year, or £400 a year for a higher-rate taxpayer.
“It’s great for people doing a bit of work on the side, for example babysitting, selling items on an online marketplace, renting out your driveaway, dog-walking or even selling jam at the local market. The good news is that if you earn less than £1,000 a year from your side hustle then you won’t usually need to fill out a tax return. Just make sure you keep track of any relevant paperwork proving your income in case HMRC asks for it later. 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.”
- Rent-a-Room scheme - £7,500
“The Government gives a tax break for anyone who rents a room out in their home. Lots of homeowners are looking to do this to generate extra money and try to counteract the rising cost of mortgages. 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%.
“You must be renting out a room (or multiple rooms) in your home, rather than a separate flat, and the room must be furnished. But it’s not limited to a room, you can rent out as much of your home as you like. You can also use it if you run a B&B or guest house, so long as it’s in the same property you live in. You don’t even need to own the home to benefit, you could be renting out part of your rental property – however, you’ll need to check that your lease doesn’t prohibit that.
“You don’t have to let the room for a minimum period of time. But be aware that if you own the property jointly with someone and split the income you only get half the relief per person. If you earn less than £7,500 a year from renting out a room you won’t need to fill in a tax return, but if you earn more than the tax-free limit you will.”
- Claim tax-free childcare - £2,000
“Families can claim up to £2,000 a year per child towards childcare costs, which can significantly help towards nursery, childminder or holiday club costs. The allowance is split into £500 per quarter and requires you to open a tax-free childcare account and pay money in. For every £8 you pay into the account the government will add £2. You then pay the nursery directly from the childcare account.
“There is a criteria for parents to be eligible: they must both be working and each earning the minimum wage for 16 hours a week or more, but also earning less than £100,000 per parent. You can claim the money per child and use it up until the 1st September following their 11th birthday. If you have a disabled child you can claim up to £4,000 per year up until their 16th birthday. You can also claim tax-free childcare at the same time as claiming the 30-hours of free childcare, assuming you’re eligible for both. You’ll need to log in to your Government gateway account and register for tax-free childcare from there, and the Government will then approve your account before you can get started.”
- Make use of the £5,000 tax-free savings allowance - £5,000
“Anyone with income of £12,570 or less gets an extra £5,000 tax-free allowance for their savings income. Called the ‘starting rate for savers’ it means that you don’t pay any tax on the interest on your savings up to £5,000. Based on the current top easy-access account savings rate of 5% that means you could have £100,000 in savings before you’d be hit with the tax. If you were taxed on that £5,000 of savings income it would equate to £1,000 of tax for a basic rate taxpayer – so it’s a very generous tax saving.
“Even if you earn between £12,570 and £17,570 you could still benefit from this tax-free savings allowance, but on a smaller amount. For every £1 of income you earn over £12,570 you lose £1 of the savings interest tax-free allowance. For example, someone who earns £1,000 over the limit will be able to earn £4,000 of savings interest tax free.
“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. Retiree couples will also find it handy, as if one of them is just reliant on the state pension they will be comfortably within the earnings limit, but often retirees have large cash savings pots to live off during retirement.”
