State pensioners can increase their tax-free income to as much as £21,330 by using two little-known HMRC rules, according to official guidance. The standard Personal Allowance is frozen at £12,570 and is set to remain at that level until at least 2031. However, by combining the Marriage Allowance and the Rent-a-Room scheme, eligible pensioners can significantly boost their tax-free threshold.
Marriage Allowance: Transfer unused allowance
Marriage Allowance is available to married couples and civil partners where one partner earns less than the Personal Allowance and the other pays income tax at the basic rate. This can apply to retired couples where one person relies on a lower income while the other continues to work or receives a larger taxable pension.
Under the scheme, the lower-earning partner can transfer £1,260 of their Personal Allowance to their spouse or civil partner, increasing the recipient's tax-free allowance to £13,830. The tax saving is worth up to £252 a year for eligible couples, and claims can be backdated for up to four tax years if the eligibility criteria were met during that period.
HMRC states: "Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner."
Rent-a-Room scheme: Earn up to £7,500 tax-free
The Rent-a-Room scheme offers another tax relief for homeowners who let furnished accommodation in the home they live in. Under the scheme, eligible homeowners can receive up to £7,500 a year in rental income without paying tax on that income. The relief applies only to rooms in a property that is the individual's main residence and cannot be used for buy-to-let properties.
Those who need to complete a self-assessment tax return must declare the rental income, but provided it does not exceed the £7,500 threshold, the income remains exempt from tax.
Combined tax-free total: £21,330
When combined, the two HMRC schemes could allow some eligible pensioners to receive up to £21,330 tax-free. That total is made up of the £12,570 Personal Allowance, a further £1,260 transferred through Marriage Allowance, and up to £7,500 of tax-free rental income under the Rent-a-Room scheme.
