There are a few ways that people can earn more than £20,000 a year without paying any tax. Sarah Coles, senior personal finance analyst at Hargreaves Lansdown discussed certain loopholes that can help lower one’s bill.
Everyone has a personal allowance which is the amount of income they can earn before they start paying any tax, and it’s currently £12,570.
Earnings over this amount are taxed at 20 percent and once someone earns £50,270, they’ll start paying 40 percent tax.
Ms Coles said: “Because the income tax thresholds have been frozen, every pay rise will push more and more people into paying higher rates of tax.
“However, there are useful allowances that can help you cut your tax bill.”
She’s explained all the ways people can earn money using different allowances before they have to start giving money back to the taxman.
Rent a room – £7,500
The rent-a-room scheme has become increasingly popular in recent years with the advent of sites like AirBnb, which have encouraged more people to rent out their homes.
If someone rents out a furnished room of their home, the first £7,500 of rent they receive each year is tax-free.
This applies for long-term lodgers, short-term lets, and if people run a guest house or B&B.
The tax exemption is automatic so Britons don’t need to do anything.
But anything over £7,500 people earn from rent will be taxable and they’ll need to complete a self-assessment tax return to declare this income.
Hobbies and side hustles – £1,000
The trading allowance means people can make up to £1,000 tax-free from casual services.
Ms Coles said: “The allowance means money-spinners don’t have to become a tax headache.”
If someone earns more than £1,000 in a tax year (which run from April 6 to April 5), they will have to tell HMRC and fill in a self-assessment tax return though.
According to HMRC, other odd jobs included in this allowance include money made at car boot sales, online selling or auction. It could also include money made from food delivery or by charging other people for using your equipment or tools.
However, Ms Coles warned: “Make sure you keep an eye on how much you’re making, because once you breach these allowances you’ll need to start taking tax into consideration.”
Save into a Lifetime ISA – £1,000
Each year, savers can put up to £20,000 into an ISA and any interest or investment gains they make are tax-free.
Ms Coles said: “Opening an ISA is a doddle and immediately protects everything in it from tax.”
But for those who are eligible, the Lifetime ISA brings a big bonus.
Lifetime ISAs can be opened by anyone aged 18 to 39, and people can put £4,000 a year into these accounts.
The money saved gets a 25 percent top-up from the Government, so if someone maxes out their allowance, they’ll get a £1,000 bonus.
There is a catch though – people can only use the money in the account either to put towards buying their first home, or when they reach retirement age. If people access the cash at any other time, they will forfeit the bonus.
Savings – £1,000
Each year people get a £1,000 savings allowance, which is the amount they can earn in interest before they pay any tax.
For higher-rate taxpayers, the allowance is £500 a year instead.
This is great for any savers who don’t use an ISA, but instead have money in a standard savings account.
For those not working, they can add this £1,000 to the £12,570 personal allowance, meaning they can earn more money before they start paying tax.