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April 6th 2019-April 5th 2020
| Tax Rate | 0% | 20% | 40% |
| Annual Income | £0-12,500 | £12,501-50,000 | £50,001-150,000 |
April 6th 2020-April 5th 2021
| Tax Rate | 0% | 20% | 40% |
| Annual Income | £0-12,500 | £12,501-50,000 | £50,001-150,000 |
If you are on a tight student budget, the last thing you want is to be taxed on your minimal income! The end of the financial year has just passed, so now is the chance to claim any tax back that you shouldn't have paid last year. It's also the time to get set for the next financial year, to make sure you don't pay too much tax this year!
The income tax system in the UK is fairly straight forward in principle but can become complicated for students, especially if you have more than one job or work full time in the holidays and not during term time. This article aims to show you how the income tax system works in the UK, what steps can be taken by students to prevent them paying too much income tax, and how to claim a tax refund if they have paid too much tax.
There are 2 taxes on your earned income: Income tax and National Insurance Contributions (NIC).
Your national insurance contributions build up your right to claim social security in future e.g. state pension and unemployment benefit. They are calculated and deducted on a monthly basis according to what you earn, and cannot be claimed back once paid.
Income tax is basically a compulsory contribution to the government, to help them finance public services. The amount you pay depends on your annual, rather than monthly, earnings.
Everyone is entitled to take some of their earnings home (income) tax free each year. Any earnings above that limit are taxed. The following table shows the tax thresholds:
April 6th 2020-April 5th 2021
| Tax Rate | 0% | 12% | 2% |
| Weekly Income | £0-182 | £183-962 | £963 + |
There is also a 'trading allowance' that means you can earn up to £1,000 doing casual or self employed work such as babysitting, online work, tutoring etc without paying tax. You do not need to declare this to HMRC but you have to keep a record if it. Find out more about trading income here.
Tax complications can arise for students because of their working patterns and because most employers deduct tax through a Pay As You Earn (PAYE) scheme. If you have a part time job throughout the year then the PAYE scheme should calculate your income tax correctly. However, if you work full time during the holidays and not during term time, the PAYE scheme can let you down and deduct more tax from your pay packets than you should pay. This is basically because PAYE deducts income tax on a monthly basis but the amount of tax you should pay depends on your annual earnings. So if you get a summer job for 10 weeks that pays you £250 a week, you will earn £2500 - which is less than the £12,500 tax threshold - so you shouldn't pay any income tax. However, £250 a week is equal to a wage of £13,000 a year - more then the tax threshold. Therefore PAYE may deduct tax from your monthly pay cheque when it shouldn't.
Employers now have to report payroll information to HMRC in real time which should reduce the likelihood of this happening but it is still worth checking at the end of the tax year that you have not had too much tax deducted from your earnings.
1. You have a part time job that pays you less than £100 a week. You do not have to pay any NIC or income tax. None should be deducted by PAYE.
2. You work part time for 45 weeks a year and earn £300 a week. £300 a week is over the £183 a week NIC threshold so you will pay 12% NIC on the £117 above the threshold. Your total earnings from the part time job for the year are £13,500 which is above the £12,500 income tax threshold so you will pay 20% income tax on the £1,000 above the threshold. PAYE may deduct more income tax than you should pay.
3. You get a summer job for 10 weeks over the summer holidays that pays £300 a week. This is your only paid work of the year. £300 a week is over the £183 a week NIC threshold so you will pay 12% NI. Your total earnings for the 10 weeks are £3,000 which is under the £12,500 income tax threshold so you should not pay any income tax. PAYE may deduct income tax because you would earn £15,600 a year if you worked all year.
If PAYE has let you down and deducted more income tax than it should have done, you can claim the overpaid tax back. The Inland Revenue have provided a tax checker on their website to help you see whether you have paid too much tax. If you have paid too much then you can claim a refund online or contact your local tax office and complete a P50 or use a tax refund specialist, such as Taxback.com (10% discount for e4s visitors).
It's all about filling in forms! If you get the right forms to the right people at the right time, you should be in business! The new financial year has just started (6th April) so now is the time to get stuck into the forms so you don't pay too much income tax this year. As a student, these are the forms you need to know about:
- P45 - make sure you get a P45 from your employer when you leave a job so you can give it to your next employer. This will ensure you are not put on an emergency tax code!
- P38(S) - no longer in use as of April 2013. Historically, if you were only going to work during the holidays (not part time work during term time) and would not earn more than the income tax threshold in a tax year, you could give your holiday job employer a P38 (S) before you started work. This would have prevented PAYE deducting any income tax from your pay packet! Sadly, you will now pay tax and have to claim it back at the end of the tax year (April 6th).
- P50 - use it to claim back any overpaid tax at the end of the tax year (April 6th). Alternatively, use a company like Taxback.com to do it for you.
- PSA - A Personal Savings Allowance has been introduced which allows you to earn up to £1,000 of interest (depending on your circumstances) on any savings in a bank or building society account without paying tax on it. Your bank or building society will pay you all the interest and HMRC will calculate whether you need to pay tax.
All these forms can be downloaded from HMRC or collected from your local tax office. If you have any queries about your tax situation not covered by this then please contact your local tax office here.
Remember, your student loan, living grants and gifts from parents or friends do NOT count towards the tax thresholds. You only pay income tax on earned income!
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