Households could boost their income by more than £16,000 (Image: GETTY)
Families are warned they may be missing out on certain tax breaks which allow them to bring in thousands of pounds each year without the tax man sniffing around.
Households could boost their income by more than £16,000 without sharing a penny of it with the taxman.
With tax allowances remaining frozen, more and more people are being pushed to pay more, however many are not making use of tax-free income.
Britons are urged to make use of tax breaks that have been deliberately designed by HMRC to help people boost their income.
Laura Suter, head of personal finance at AJ Bell explains how the tax hacks work.
Everyone can earn up to £1,000 tax free from side hustles (Image: GETTY)
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 partnership share their tax-free earnings allowance each year. It means that if one of them hasn’t used up their Personal Allowance of £12,570 a year, they can hand it over to their partner. That could save them up to £252 in the current tax year.
She said: “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 your and your partner’s National Insurance numbers plus some forms of ID. But 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 people can earn £1,000 from property or trading income it will be tax-free – if they’re a basic-rate taxpayer this will save people up to £200 a year, or £400 a year for a higher-rate taxpayer.
Ms Suter said: “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 Government gives a tax break for anyone who rents a room out in their home (Image: GETTY)
“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. People can make up to £7,500 a year tax free through rent-a-room relief, which will save them up to £1,500 a year as a basic-rate taxpayer or £3,000 a year if they pay income tax at 40 percent.
Britons must be renting out a room (or multiple rooms) in their home, rather than a separate flat, and the room must be furnished. But it’s not limited to a room, people can rent out as much of their home as they like. They can also use it if they run a B&B or guest house, so long as it’s in the same property they live in.
Individuals don’t even need to own the home to benefit, they could be renting out part of their rental property – however, they’ll need to check that their lease doesn’t prohibit that.
Ms Suter added: “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 someone to open a tax-free childcare account and pay money in. For every £8 they pay into the account, the government will add £2. They 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.
They can claim the money per child and use it up until the September 1 following their 11th birthday. If they have a disabled child they can claim up to £4,000 per year up until their 16th birthday.
People can also claim tax-free childcare at the same time as claiming the 30-hours of free childcare, assuming they’re eligible for both. They’ll need to log in to their Government gateway account and register for tax-free childcare from there, and the Government will then approve their account before they can get started.
Make use of the £5,000 tax-free savings allowance – £5,000
Anyone with an 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 people don’t pay any tax on the interest on their savings up to £5,000.
Based on the current top easy-access account savings rate of five percent that means people could have £100,000 in savings before they’d be hit with the tax. If they 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.
Ms Suter continued: “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.”
