An expert has explained how people can raise the tax threshold to £16,000 – by using five allowances. Many families are unaware of five allowances that could help make £16,000 of their current or potential income exempt from tax.

The lowest income tax threshold has remained static at £12,570 since 2021, while wages have steadily risen due to inflation. These thresholds dictate how much individuals can earn before they start paying tax, currently set at £12,570 for the basic 20 per cent band, £50,270 for the higher 40 per cent band, and £125,140 for the additional 45 per cent band.

And millions of people have until tomorrow to fill in their tax returns to the HMRC – or face penalties. However it is possible their tax burden could be greatly reduced with these tips.

The Institute for Fiscal Studies in a recently published report has revealed the consequences of the ongoing freeze on income tax thresholds – particularly affecting the lowest-paid workers. It stated: “In fiscal terms, the impact of threshold freezes has already been substantial.

“Freezes to the thresholds at which the basic (20%) and higher (40%) rates of income tax begin to apply are alone expected to raise £39bn a year in 2029–30 (roughly similar to the amount of revenue that would be raised by increasing all rates of income tax by 3.5 percentage points).”

Laura Suter from investment platform AJ Bell told Sky Money that people can in fact use some perfectly legal ways to avoid some of the tax. She said: “Many households are overlooking completely legitimate ways to earn tax-free income, simply because they don’t realise what’s available. A little bit of knowledge about how the tax system works can go a long way.

Utilise the £5,000 tax-free savings allowance – £5,000.

Anyone with an income of £12,570 or less receives a £5,000 tax-free allowance for their savings income.

Known as the “dtarting rate for savers”, it means that you don’t pay any tax on the interest on your savings up to £5,000. Even if you earn between £12,570 and £17,570, you may still benefit from this tax-free savings allowance, albeit on a reduced amount.

For every £1 of income you earn above £12,570, you forfeit £1 of the savings interest tax-free allowance. For instance, someone who earns £1,000 over the threshold will be able to earn £4,000 of savings interest, tax-free.

“This trick is particularly handy for couples where one has a low income but as a household they have a decent amount in savings,” says Suter.

“If you transfer the bulk of the savings to the lower-earning half of the couple, you can maximise the tax-free limit.”

Marriage allowance – £1,260.

If one partner earns between £12,570 and £50,270 annually and the other either earns less than £12,570 (or nothing at all), you should be eligible for a tax break.

The partner earning below the £12,570 personal allowance can transfer up to £1,260 of this allowance to their higher-earning partner.

This means the point at which they start paying income tax could increase from £12,570 to £13,830. This £1,260 of additional tax-free income reduces a tax bill by £252.

Around two million couples were eligible for this tax break but not claiming it – including some where one partner is retired.

You can verify if you’re eligible using the government’s calculator – though beware of scam websites that are designed to look like the government website. These two are now eligible for marriage allowance.

These two are now eligible for marriage allowance.

Trading allowance – £1,000.

Everyone can earn up to £1,000 tax-free from side hustles or other money-making ventures that are separate from their main job. If you’re a basic-rate taxpayer, this will save you up to £200 a year, or £400 a year for a higher-rate taxpayer.

“It’s great for people doing a bit of work on the side, for example – babysitting, selling items on an online marketplace as a business, renting out your driveway, dog-walking or even selling jam at the local market,” says Suter.

“Just make sure you keep track of any relevant paperwork proving your income in case HMRC asks for it later.”

Rent-a-room scheme – £7,500.

The Government provides a tax break for anyone who rents a room out in their home. Many homeowners are looking to do this to generate additional income and try to offset the rising cost of mortgages. You can earn up to £7,500 a year tax-free through rent-a-room relief, which will save you up to £1,500 a year as a basic-rate taxpayer or £3,000 a year if you pay income tax at 40%.

Suter says: “You must be renting out a room (or multiple rooms) in your home, rather than a separate flat, and the room must be furnished. But it’s not limited to a room; you can rent out as much of your home as you like. You can also use it if you run a B&B or guest house, so long as it’s in the same property you live in.”

Be mindful that if you own the property jointly with someone and divide the income, you only receive half the relief per person.

Claim tax-free childcare – £2,000.

Numerous parents aren’t aware they can receive up to £2,000 annually for each child to assist with childcare costs – completely separate from the government’s 30-hour scheme that was extended in September. Sign up for Tax-Free Childcare and you’ll receive an account you can use to pay for care for children aged up to 11.

For every £8 working parents deposit into the gov.uk childcare account, the government automatically adds £2, up to £2,000.

Some 1.3 million families qualify, but around 800,000 aren’t utilising this benefit.

Children cease being eligible on 1 September after their 11th birthday, unless they have a disability, in which case their parents receive up to £4,000 annually until 1 September after their 16th birthday.

Parents must earn at least the minimum wage for 16 hours weekly on average to qualify.

Those receiving universal credit or childcare vouchers aren’t eligible, and neither are households where one parent earns more than £100,000.