10 ways to get income without paying any tax – how many of these loopholes did you know?
MILLIONS more people are set pay income tax this year thanks to below inflation increases in the personal allowance.
But there are still plenty of legal ways to take a tax-free income with a few perfectly legal loopholes.
The personal allowance stands at £12,570 and is the amount you can earn without paying any tax – anything above this limit will start to trigger income tax.
The personal allowance has not changed since the 2020/21 tax year meaning that with inflation and rising wages more people naturally get pulled into paying tax.
It’s estimated 3.2 million more people will pay income tax in the current tax year than would have paid it if the personal allowance had risen with inflation, according to savings and investment provider Hargeaves Lansdown.
At the same time, 2.5 million more people will pay higher and additional rate tax of 40% and 45% respectively, which kicks in earnings above £50,270 and £125,140.
And it’s only going to get worse because tax thresholds have been frozen until April 2028, says Sarah Coles, head of personal finance at Hargreaves Lansdown.
She added: “More of us are taxpayers now, and more pay tax at higher rates.
“Gone are the days when being a higher rate taxpayer was the preserve of the very wealthy – now around a fifth of taxpayers pay higher or additional rates.”
Yet, there are ways that you can escape the tax raid and legally take an income without handing a share to the taxman.
Here’s how…
Get a lodger
If you have a spare room in your home, you could rent it to a lodger and the first £7,500 of income each year is tax free. The exemption is automatic meaning you don’t have to do anything.
However, be aware that if you do breach this limit you will need to do a tax return and pay tax on anything above it.
If you decide to rent out part of your home, you will need to get a tenancy agreement in place.
A professional letting agency can help you source prospective tenants and do background checks but will charge fees for doing so.
Make cash from a hobby
The first £1,000 of income from a hobby is tax free, thanks to the trading allowance.
So it could be worth considering if you could spend more time on a side hustle and monetise it.
This could include items bought and sold through second-hand selling sites such as eBay specifically for a profit.
Cash you generate by getting rid of your own belongings isn’t taxable.
Do I need to pay tax on my side hustle income?
MANY people feeling strapped for cash are boosting their bank balance with a side hustle.
The good news is, there are plenty of simple ways to earn some additional income – but you need to know the rules.
When you’re employed the company you work for takes the tax from your earnings and pays HMRC so you don’t have to.
But anyone earning extra cash, for example from selling things online or dog walking, may have to do it themselves.
Stephen Moor, head of employment at law firm Ashfords, said: “Caution should be taken if you’re earning an additional income, as this is likely to be taxable.
“The side hustle could be treated as taxable trading income, which can include providing services or selling products.”
You can make a gross income of up to £1,000 a year tax-free via the trading allowance, but over this and you’ll usually need to pay tax.
Stephen added: “You need to register for a self-assessment at HMRC to ensure you are paying the correct amount of tax.
“The applicable tax bands and the amount of tax you need to pay will depend on your income.”
If you fail to file a tax return you could end up with a surprise bill from HMRC later on asking you to pay the tax you owe – plus extra fees on top.
Make money from your home
Aside from renting out a room, you can use your property to make £1,000 a year tax free.
Laura Suter, director of personal finance at savings platform AJ Bell, explains: “Some people have made use of this to rent out spaces such as their driveway, with dedicated apps helping people make the most of living in commuter areas or near popular sporting venues.
“If your total income is below the £1,000 threshold you don’t need to report it at all. If you own property jointly with others, you can each use your £1,000 allowance against your share of the income.”
JustPark and Park On My Drive are two platforms connects platforms with people willing to pay for parking spaces.
Or you could rent out your home as filming location. You’ll need to register with an agency first. You can look online and check for customer feedback to find the best option.
Savvy savings
Basic rate taxpayers can receive up to £1,000 in interest from savings accounts each year without paying tax.
Higher-rate taxpayers can receive up to £500 while additional rate taxpayers don’t have this allowance.
You need to have quite a chunk of cash to generate this amount of interest – the exact amount will depend on the interest rate you are getting – but a basic rate taxpayer would need at minimum around £20,000 tucked away.
You will usually need to stay on top of the market and be prepared to move cash to get the best interest rate. You can use a comparison site such as MoneySupermarket to find the best paying account and search by different types.
Starting rate for savings
If you earn less than the personal allowance from wages and pensions, you get the starting rate for savings and the first £5,000 of interest on your savings is tax free.
You’ll also get the personal savings allowance on top of that and can make £12,570 from wages, and £6,000 in savings interest without paying any tax, Hargreaves Lansdown says.
However, for every £1 of non-savings income over your personal allowance, you lose £1 of your starting savings allowance, so if you earn £17,570 you lose all the allowance.
Use an ISA
Savers can put up to £20,000 in a cash or stock and shares ISA in the current tax year.
Laura Suter adds: “The beauty of this money is that any interest, income or growth in the account is tax free, and any withdrawals you make from it are tax free.
“That means if you build up a decent pot of money in your ISA, you could supplement your income by making tax free withdrawals from your ISA.
“A £10,000 withdrawal from an ISA is equivalent to around £14,000 of pre-tax earnings for a basic-rate taxpayer, showing how valuable the tax-free element is.”
In an investment ISA, you can also take bond income or UK dividend income free of tax, as well as cashing in investments without paying capital gains tax.
Or you can use a lifetime ISA to buy your first property, the cash will go straight into your new home tax-free.
Alterativley, you can use the LISA to save for retirement for tax-free income stream from the age of 60.
Save in Premium Bonds
You can save money through Premium Bonds and instead of interest go into a monthly draw to win cash prizes from £25 up to £1 million.
All prize are tax-free and you can save from £25 up to £50,000.
However, the chances of winning are pretty slim and you may end up with nothing at all from your savings.
Finance experts at AJ Bell revealed that most Premium Bond holders will never win a prize.
An FOI obtained by the firm showed two-thirds of those holding the bonds have never won, so you should carefully consider if it is the best option for your cash before investing.
Share allowances with a partner
The Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner which works well for couples where one might be working and the other is not.
Transferring this allowance can reduce the working partner’s tax by up to £252 in the tax year.
Even if you are working, transferring some of the allowance could mean paying less tax as a couple.
For example, if your income is £11,500 and your Personal Allowance is £12,570, so you do not pay tax.
At the same time, if your partner’s income is £20,000 and their Personal Allowance is £12,570, they pay tax on £7,430.
If you were to transfer £1,260 of your Personal Allowance to your partner. Your Personal Allowance becomes £11,310 and your partner gets a ‘tax credit’ on £1,260 of their taxable income.
This means you will now pay tax on £190, but your partner will only pay tax on £6,170.
As a couple you benefit, as you are only paying Income Tax on £6,360 rather than £7,430, which saves you £214 in tax.
You can also backdate claims to April 2020. You can apply for the allowance at gov.uk.
Income protection if you need it
Income protection insurance policies are designed to payout if you can’t work due to injury or illness. Income might come weekly or monthly.
If you do claim any income paid through your policy is tax-free. The policies can be an essential tool in financial planning and protecting your finances.
A good independent financial adviser can talk you through the options. You can find a well-rated professional local to you at unbiased.co.uk.
Make the most of employer perks
Some employers allow you to use income before tax to get certain benefits tax-free.
Although you can’t take income without paying cash you can in effect avoid paying tax.
Laura Suter says: “You can actually give up some of your pay each month in exchange for certain ‘non-cash’ benefits from your employer.
“The most common example is higher pension contributions, but other benefits include bicycles, workplace nurseries and mobile phones too.”
How do I file a tax return?
TO file a self assessment tax retun, you'll need to register with HMRC first, which will then issue you with a Unique Taxpayer Reference (UTR).
You must register for self assessment by October 5 if you have to file a tax return and you have not sent one before.
You can do so by visiting www.gov.uk/register-for-self-assessment.
If you’ve previously registered and already have a UTR, you don’t need to go through this step again.
Once you’ve got your UTR, you can sign in via the “Self Assessment tax return” section of HMRC’s website by visiting www.gov.uk/log-in-file-self-assessment-tax-return.
You can then file your self assessment tax return online.
The deadline for sending a return online is January 31 every year.
If you need a paper copy of the main Self Assessment tax return, call HMRC on 03000 200 3610 and request an SA100 form.
The deadline for sending a return using a paper form is October 31 every year.
You need to pay the tax you owe by midnight on January 31 each year.
HMRC accepts your payment on the date you make it, not the date it reaches its account.
File late and HMRC will issue you with a fine.