Money: Pay as you learn?

TAX TIPS; Many students earn money - but they may need a lesson in tax liability, says Elspeth May

Tax is probably one of the last things on the minds of students going (or going back) to college this autumn. But a little knowledge about this most dry of subjects is worth having, not least because for many students it could mean more cash in their pockets.

Everyone, whether studying or not, can have a total annual income of at least pounds 4,045 before they are liable for any tax on that money.

For students, this total includes holiday earnings, work placement income and interest on savings. The student grant is on top of these figures: however reduced it may be, it is tax-free, and student loans are also ignored.

If the potentially taxable elements of your income fall within the pounds 4,045 limit, and for many people they will, you could even be due a tax refund.

Banks and building societies will pay interest gross if you ask them properly (a form IR85 is what you will need to fill in); even if you don't do it this way, you can apply to the Inland Revenue for the tax to be repaid.

Many students try to supplement their income with holiday work. Some people believe that being paid in cash somehow avoids the obligation to pay tax. Life, unfortunately, is not so simple. Firstly, it is the employer's duty to establish whether or not someone is an employee or is providing self-employed services. The vast majority of students, in these circumstances, will be employed. In this case, their employers need to decide whether or not they have to deduct tax from their student workers' incomes.

If the student can show that his or her total income in the tax year is within the personal allowance, the employee can sign a form P38(S) and give this to the employer - this will confirm that tax need not be deducted. If the student's total income is above this limit, however, he or she will need to sign a form P46, and the employer will then contact the tax office to establish what tax should be deducted.

It is important to ensure that these procedures are followed properly. There is nothing worse than having the Inland Revenue come along at a later date and request a large sum to settle historic tax liabilities. It is much easier to get your tax affairs on a sound footing right from the outset.

Some students may earn money in gap years abroad or in overseas holiday work. Unless they are out of the United Kingdom for more than six months they will probably be considered to be resident in the UK for tax purposes so all their earnings, wherever they arise, will be taxable here.

Foreign employers may deduct tax at source under their own tax rules. It should be possible for a student to get credit for this tax against any UK tax liability although, in general terms, such foreign tax would not give rise to a repayment in Britain.

Even after all this, however, students may find that they have paid more tax than they need. In this case they should fill in a tax repayment claim at the end of the tax year and send it to their local tax office.

Of course, there will come a time when tax rebates do become a rarity - when students graduate and (it is to be hoped) find a job.

New employers will want to know whether a student has had any previous earnings and will ask for a form for earnings (P45) from a previous employer. Failing this, new employers should follow the P46 procedures to obtain a tax code for the former student.

This takes into account the personal allowance to which the individual is entitled and should ensure that he or she pays the right amount of tax each month. Always check your tax code as soon as you receive it from the Inland Revenue and promptly discuss with them anything that does not seem right.

For the less fortunate of graduates, a period of unemployment may be unavoidable after leaving college. The jobseeker's allowance is potentially taxable but the current basic allowance would fall well within someone's personal allowance. So in practice it would only be taxable if other income is earned within the tax year.

q Elspeth May is personal financial services partner at KPMG, the accountancy firm.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence