Families could boost their income by more than £16,000 without handing a penny of it to the taxman, using five simple tax hacks.
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 director of personal finance, Laura Suter, explains how the tax hacks work: “More people are being dragged into paying higher levels of tax, largely due to frozen allowances and thresholds that haven’t kept up with inflation. But at the same time, many households are overlooking completely legitimate ways to earn tax-free income, simply because they don’t realise what’s available. A little bit of knowledge about how the tax system works can go a long way.
“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. In fact, these allowances and exemptions are designed to help people make the most of their money.
“It’s also a good nudge for couples to think about how they divide their income and savings, as small changes can make a big difference to the amount of tax you pay as a household. And if you can squirrel away the money you’ve saved into a savings or investment account, it could give your finances an extra boost for the future, whether that’s for a holiday, a house move or just a rainy-day cushion.”
1. Marriage allowance – £1,260
“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 partnership 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 your partner. That could save you up to £252 in the current tax year. It’s thought around two million couples are eligible for this tax break but not claiming it, and even those where one half of the couple is retired can claim the tax break.
“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 £1,260, including the current year’s claim. 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. You can check if you’re eligible using the government’s calculator. But beware of scam websites that are mocked up to look like the government website but are actually imposters.”
2. 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 as a business, 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.”
3. 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.”
4. 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.
“Not all parents will 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 adjusted net income per parent. You can claim the money per child and use it up until 1 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.”
5. Make use of the £5,000 tax-free savings allowance – £5,000
“Anyone with income of £12,570 or less gets a £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 up to £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 free of tax.
“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 could also find it handy, as if one of them is just reliant on the state pension they will be within the earnings limit and often retirees have large cash savings pots to live off during retirement.”
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