HMRC has shared an important update for people who file self-assessment tax returns in the UK. Now, eligible taxpayers can claim up to £20,070 in tax-free income. This is a big jump from the usual limit of £12,570.

This new tax-free limit is possible by combining the regular Personal Allowance with the Rent-a-Room Scheme. It’s a useful way to reduce your taxes, especially with rising costs due to inflation.

What Is the Updated Tax-Free Limit?

The Personal Allowance has stayed the same at £12,570 for many years. It will likely remain frozen until 2028. Because of inflation and higher wages, more people are being pushed into higher tax bands. This is called fiscal drag.

But now, people who file self-assessment can raise their tax-free income to £20,070. This is done by using the Rent-a-Room Scheme alongside the Personal Allowance.

How Is the £20,070 Tax-Free Allowance Calculated?

The total tax-free income is made by adding two parts:

Allowance Type	Amount
Personal Allowance	£12,570
Rent-a-Room Relief	£7,500
Total Tax-Free Income	£20,070

To get this full amount, you must report it on your self-assessment tax return and follow the rules for the Rent-a-Room Scheme.

Who Can Claim Rent-a-Room Relief?

To qualify for the extra £7,500 tax-free from renting a room, you must meet these conditions:

• The room must be in the home where you live.
• The room must be furnished.
• You must report the income in your tax return.
• If your income is under £7,500, you are in the scheme automatically.

If you earn less than £7,500 from letting the room (about £625 a month), you don’t need to pay any tax on it. If you earn more, you have two choices:

• Pay tax on the full amount.
• Join the scheme and pay tax only on the income above £7,500.

When to Opt Out of the Scheme

Most people will save money by using the Rent-a-Room scheme. But in some cases, it may be better to opt out.

If you spent a lot on repairs or other costs for the room, you might want to treat it like normal rental income. That way, you can reduce your tax by subtracting those costs.

So, if you have losses or high expenses, opting out might give you better results.

Current UK Income Tax Bands

Here is a quick look at the current income tax bands in the UK:

Band	Income Range	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic Rate	£12,571 – £50,270	20%
Higher Rate	£50,271 – £125,140	40%
Additional Rate	Over £125,140	45%

Because the bands are frozen, many people are moving into higher tax groups. That’s why using things like the Rent-a-Room Scheme is helpful to keep more of your money.

Steps to Get the Full £20,070 Tax-Free Income

To make sure you get this benefit, follow these steps:

• Submit your self-assessment tax return.
• Report your rental income (if you rent a room).
• Make sure the room is in your main home and is furnished.
• Keep records in case HMRC checks your claim.

If done right, this scheme helps you keep more income without paying tax.

Conclusion

This change is great news for self-employed people or anyone using self-assessment. The chance to earn up to £20,070 tax-free is a big help, especially with the cost of living going up.

By using the Personal Allowance and Rent-a-Room Relief together, you can reduce your tax in a legal and simple way. Just make sure to follow the rules and report everything correctly.

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