Yet a quiet HMRC rule may lift what you take home this winter.
With the freeze on income tax thresholds still in place, many workers have watched pay rises swallowed by higher deductions on their payslip. The standard Personal Allowance remains stuck at £12,570, and the chill of fiscal drag keeps spreading as wages chase prices.
There is a lawful workaround that has gained traction as budgets tighten before Christmas. It sits inside HM Revenue and Customs guidance and, used correctly, can raise tax-free income to £20,070 for some households. That figure turns heads.
The frozen tax bands pulling more workers into higher rates
Income tax thresholds have been fixed since 2021 and remain locked until at least 2028. When bands do not move, more people drift into tax with each pay review. Economists call it fiscal drag, and it has become a feature of this year’s pay packets as inflation eases but does not vanish.
The core rules are familiar. You can earn up to the standard Personal Allowance of £12,570 before tax kicks in. The basic rate of income tax is 20 percent on earnings above that level up to £50,270, then 40 percent applies beyond that threshold. Additional rate taxpayers pay 45 percent on income over £125,140.
While the Government has kept the bands frozen, more Britons have looked for fully legal ways to make their money stretch. And yet there is a little known scheme that does not touch your main employment income at all.
The Rent a Room scheme that quietly lifts your tax-free income
HMRC’s Rent a Room scheme lets you earn extra income by renting out furnished accommodation in your main home. The allowance is capped at £7,500 per tax year, or £3,750 if you share the income with someone else in the same property. Stay within the threshold and the exemption applies automatically with no tax due on that rental income.
Crucially, the scheme only covers a lodger in your primary residence. It does not apply to a separate buy-to-let and it is not designed to offset standard landlord costs on an investment property. The aim is simple, encourage spare rooms to be used while giving household budgets some breathing space.
Combine the £7,500 allowance with the standard Personal Allowance of £12,570 and you reach £20,070 of potential tax-free income. That can be the difference between covering higher energy bills this winter and dipping into savings. It also means your day job stays taxed as normal while the lodger income enjoys a ring-fenced relief.
How to use the HMRC allowance without getting caught out
If your lodger income is below the £7,500 threshold, the exemption applies automatically. If you go over the threshold, you must complete self assessment and opt into the scheme on your tax return. Go above the allowance and the tax will only apply to the excess once you claim the relief. Keep clear records, because HMRC can ask for details.
You can choose to opt out and be taxed in the normal way. That route can make sense if you have unusual costs that create a loss, for example major refurbishment after damage, which you wish to set against taxable property income elsewhere. If you are a typical homeowner taking in a lodger for a few months, opting in is usually simpler and the admin is lighter, even if the rules feel abit dense at first glance.
Remember the practicalities. The room must be furnished and inside the home where you live. Short term demand often spikes in autumn and winter as students arrive, NHS staff rotate and seasonal workers need somewhere to stay. A written agreement, a clear house rule sheet and a quick safety check can save time later.
- At a glance, the Rent a Room threshold lets you earn up to £7,500 tax free from a furnished room in your main home.
There is one more thing to weigh up. The allowance is generous, but it is not a licence to treat a lodger like a tenant under a long lease. You still control who shares your kitchen and bathroom, and you can decide the length of stay and the house rules. That flexibility is part of why this HMRC relief has endured.
Taken together, a steady wage, the frozen bands, and this targeted relief paint a clear picture for late 2025. Households with a spare room can unlock a meaningful slice of tax-free income while staying within the rules. The key is using the scheme as intended and filing on time when you need to.
