Five legal loopholes that could increase household income by £16,000 tax-free

You can take advantage of opportunities to keep more of your income tax-free if you understand the tax system

Using five tax system quirks, families could increase their income by over 16,000 without giving a single cent to HMRC.

Fiscal drag is the process by which more people are being drawn into higher tax bands as a result of income tax thresholds that are frozen until 2028.

According to a Freedom of Information request made in April by wealth manager Quilter, an additional 12 million people will be higher rate taxpayers by the 2027 - 2028 tax year, and an additional two million will pay the higher rate of income tax.

Even higher earners are clearly feeling the pinch, especially in light of the significant reductions in dividend allowances and the rise in capital gain tax rates.

However, if you understand the infamously complicated UK tax system, there are ways to keep more of your income tax-free that are completely approved by HMRC and well within the means of the typical household.

"A lot of households are missing out on entirely legal ways to generate tax-free income because they are unaware of what is available," stated Laura Suter, director of personal finance at AJ Bell.

"The goal of these exemptions and allowances is to maximize people's financial resources. It can be very beneficial to have some understanding of how the tax system operates.

How to earn money without paying taxes.

1. The maximum marriage allowance is 1,260.

If one partner makes less than £50,270 annually and the other makes less than £12,570 or nothing at all, the marriage allowance may be beneficial to you. Your spouse or civil partner may receive 1,260 of your unused personal allowance. You might be able to save up to 252 this tax year.

For instance, you do not pay taxes if your income is 11,500 and your personal allowance is 12,570.

Your partner's taxable income is 7,430, which is equal to their income of £20,000 plus their personal allowance of £12,570. This indicates that you are paying £7,430 in income tax as a couple.

You give your partner 1,260 of your personal allowance when you claim the marriage allowance. Your partner receives a tax credit of 1,260 of their taxable income, and your personal allowance increases to 11,310.

In other words, your partner will only pay tax on 6,170, while you will now pay tax on 190. You benefit as a couple because you only pay income tax on £6,360 instead of £7,430, saving you £214.

Two million couples are believed to be eligible for this tax break but are not taking advantage of it; couples in which one partner is retired may also do so.

Assuming you were eligible during those years, "what's even better is that you can backdate any claims for up to four years, which would get you a total of 1,260, including the current year claim," Suter stated.

You only need your partner's and your own national insurance numbers, along with a few forms of identification, to make an online claim via the government website. You can use the government calculator to see if you qualify. Watch out for fraudulent websites that pose as official government websites but are actually fakes.

2. Trading allowance: 1,000.

Anyone who engages in side projects or other revenue-generating activities outside of their primary employment can earn up to £1,000 tax-free. Because of the so-called trading allowance, if you make £1,000 from trading or real estate, you will not be subject to taxes. If you are a basic-rate taxpayer, this can save you up to £200 annually, or £400 if you are a higher-rate taxpayer.

"If your side business brings in less than £1,000 annually, you won't typically have to file a tax return," Suter said. If HMRC requests it later, just be sure to keep track of any pertinent documentation attesting to your income.

You will still receive the tax break if your side business brings in more than £1,000 during a tax year, but you will have to file a tax return to report the additional revenue and pay any applicable taxes.

3. The room-rent plan costs 7,500.

You can make up to 7,500 tax-free annually by renting out furnished accommodations in your home under the rent-a-room scheme. As a basic-rate taxpayer, you can save up to 1,500 annually by renting out as much of your house as you like. If you pay income tax at 40 percent, you can save up to 3,000 annually.

Instead of renting out a separate apartment, you must be renting out a room (or several rooms) in your house, and the room needs to be furnished. As long as it's on the same property as your home, you can also use it if you own a guest house or bed and breakfast," Suter said.

You can get benefits even if you don't own the house; you just need to make sure your lease doesn't forbid you from renting out a portion of your rental property. You won't have to file a tax return if your annual income from room rentals is less than £7,500; however, you will if your income exceeds the tax-free threshold.

4. . Get £2,000 in tax-free childcare.

For each child, you can receive up to £500 every three months (up to £2,000 annually) to assist with childcare expenses. This increases to 1,000 every three months (up to 4,000 annually) if a child has a disability.

Your child will have an online childcare account if you receive tax-free childcare. To pay your provider, the government will deposit two dollars for every eight you deposit into this account.

If you qualify for both 15 or 30 hours of free childcare, you can receive both at the same time.

Not all parents will qualify, according to Suter, who stated that each parent must be employed, make at least 16 hours per week at the minimum wage, and make less than £100,000 in adjusted net income.

The funds are available for each child to use until September 1st after their eleventh birthday. Before you can begin using tax-free childcare, you must first register by logging into your government gateway account. The government must then approve your account.

5. . Utilize the £5,000 tax-free savings cap.

It is possible that over two million savers will fall into the savings tax trap and have to pay interest taxes this year. However, this can be avoided.

A 5,000 tax-free allowance for savings income is granted to anyone with an income of £12,570 or less. Known as the "starting rate for savers," it indicates that you are exempt from paying taxes on interest on your savings up to £5,000.

With the current top easy-access account savings rate of 5%, you could theoretically save up to £100,000 before paying taxes. For a basic-rate taxpayer, the 5,000 in savings income would be equivalent to 1,000 in taxes if it were taxed. This represents a substantial tax savings.

When one partner has a low income but the household has a sizable amount of savings, this trick is especially helpful. "You can maximize the tax-free limit if you shift the majority of the savings to the lower-earning half of the couple," Suter stated.

Couples who are retired may also find it useful because, if one of them only receives the state pension, they will be within the earnings cap, and retirees frequently have sizable cash savings accounts to live on in retirement.

Although it would be less, you could still take advantage of this tax-free savings allowance if your income was between £12,570 and £17,570. You lose one savings interest tax-free allowance for every £12,570 in income. A person who makes £1,000 more than the cap, for instance, will be eligible to receive £4,000 in tax-free savings interest.

You are still eligible to receive the personal savings allowance even if you are not eligible. Depending on your income tax bracket, you could receive up to £1,000 in interest that is tax-free.

Add all of the interest you've received to your other income to determine your tax bracket.

Alternately, you could invest up to £20,000 annually in an ISA, where profits are entirely tax-free and withdrawals are tax-free.