Month: April 2023

The rent-a-room scheme is a set of special rules designed to help homeowners who rent-a-room in their home. If you are using this scheme, you should ensure that rents received from lodgers during the current tax year do no exceed £7,500. The tax exemption is automatic if you earn less than £7,500 and there are no specific tax reporting requirements. If required, homeowners can opt out of the scheme and record property income and expenses as usual.

The relief only applies to the letting of furnished accommodation and is used when a bedroom is rented out to a lodger by homeowners in their home. The relief also simplifies the tax and administrative burden for those with rent-a-room income up to £7,500. The limit is reduced by half if the income from letting accommodation in the same property is shared by a joint owner of the property.

The rent-a-room limit includes any amounts received for meals, goods and services provided, such as cleaning or laundry. If gross receipts are more than the limit taxpayers can choose between paying tax on the actual profit (gross rents minus actual expenses and capital allowances) or the gross receipts (and any balancing charges) minus the allowance – with no deduction for expenses or capital allowances.

Students that work may need to pay Income Tax and National Insurance. Employers are required to calculate the amount of tax they need to pay on the basis that the students would be working for the rest of the tax year.

This means that an overpayment of Income Tax can occur when a student or temporary worker earns more than their monthly tax-free allowance of £1,042, but over the course of the tax year earn less than their annual allowance. For example, a student only working over the summer period and earning more than £1,042 a month is unlikely to have exceeded the current £12,570 tax free personal allowance.

Students (and other temporary workers) are not required to pay Income Tax if their earnings are below the tax-free personal allowance, currently £12,570.

A refund of overpaid tax can be requested using an online version of the P50 form entitled Claim for repayment of tax. The P50 form can only be used if you are not going to work for at least the next 4 weeks and are not claiming certain state benefits.

Any students that are continuing to work for the rest of the tax year in part-time jobs should consider waiting until the end of the tax year to make a claim.

If you earn over £100,000 in any tax year your personal allowance is gradually reduced by £1 for every £2 of adjusted net income over £100,000 irrespective of age. This means that any taxable receipt that boosts your income over £100,000 will result in a reduction in personal tax allowances. Accordingly, your personal Income Tax allowance would be reduced to zero if your adjusted net income is £125,140 or above.

Your adjusted net income is your total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.

For the current tax year if your adjusted net income is likely to fall between £100,000 and £125,140 you would pay an effective marginal rate of tax of 60%.

If your income sits within this band you should consider what financial planning opportunities are available in order to avoid this personal allowance trap by reducing your income below £100,000. For example, by giving gifts to charity, increasing pension contributions and participating in certain investment schemes.

A higher rate or additional rate taxpayer who wanted to reduce their tax bill could make a gift to charity in the current tax year and then elect to carry back the contribution to 2022-23. A request to carry back the donation must be made before or at the same time as the 2022-23 Self-Assessment return is completed and filed, i.e., by 31 January 2024.

A reminder that there are two separate annual £1,000 tax allowances for property and trading income. If you have both types of income highlighted below, then you can claim a £1,000 allowance for each.

The £1,000 exemptions from tax apply in the following circumstances:

• If you make up to £1,000 from self-employment, casual services (such as babysitting or gardening) or hiring personal equipment (such as power tools). This is known as the trading allowance.
• If your annual gross property income is £1,000 or less, from one or more property businesses, you will not have to tell HMRC or declare this income on a tax return. For example, from renting a driveway or power tools. This is known as the property allowance.

Where each respective allowance covers all the individual’s relevant income (before expenses) the income is tax-free and does not have to be declared. Taxpayers with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. 

You cannot use the allowances in a tax year, if you have any trade or property income from:

• a company you or someone connected to you owns or controls;
• a partnership where you or someone connected to you are partners; and
• your employer or the employer of your spouse or civil partner.

You cannot use the property allowance if you:

• claim the tax reducer for finance costs such as mortgage interest for a residential property; and
• deduct expenses from income from letting a room in your own home instead of using the rent-a-room scheme.