6 things students really need to know about tax

Don’t believe the hype: tax is taxing – the clue’s in the name – but it doesn’t have to be traumatic

Owen Burek
Wednesday 11 March 2015 13:56 GMT
Students arriving for Manchester University's freshers week queue up at a cash machine to draw money on September 22, 2009 in Manchester, England.
Students arriving for Manchester University's freshers week queue up at a cash machine to draw money on September 22, 2009 in Manchester, England.

Getting to grips with tax may not be your go-to Friday evening activity, but reading this could save you a whole load of stress and money. We’ll help you maximise what you make from a part-time job, show you how to get more from your savings, and give it to you straight about how this stuff affects your student finance.

Students do have to pay tax…

That they don’t is a bit like the urban myth that you’ll automatically pass an exam if another candidate dies during it: it’s only true for some students, at some universities, some of the time.

The bottom line is that everyone in the UK is liable to pay tax on income after a certain point – that being the golden number which from April 2015 is £10,600. That’s your personal allowance (PA) for 2015/16 and you’ll only pay tax on anything you earn above it.

The financial year runs from April to April. It’s what you earn during that time that counts towards that year’s allowances and charges

Taxable income includes wages and interest from most bank accounts. Non-taxable income includes things like ISAs, student finance and some benefits.

If you do manage to top your personal allowance you’ll pay tax on the difference – the basic rate is 20 per cent on income up to around £30,000, with a higher rate on anything you earn above that.

You can reclaim over-paid tax and National Insurance

If you’ve got a job your employer should deduct tax and National Insurance (NI) before paying you, through a scheme called Pay as You Earn (PAYE). NI is your contribution to the country’s social care funds – underpaying may affect what benefits you can later receive, which is why it’s usually taken out of your wages before you’re paid.

Lots of students won’t come close to earning their personal allowance, but PAYE is often wrongly calculated (basically forgetting your tax-free PA altogether). This leaves many owed hundreds in overpayments from Her Majesty’s coffers.

Always check the tax code on your payslips and contact HMRC if it’s not right or you could end up either under or overpaying.

HMRC (the UK’s tax collector) will sometimes automatically refund overpaid tax. If not, you should take steps to ensure they pay it all back. You can quickly check if you’ve paid too much here.

If you run any kind of business that nets you an income you’ll need to arrange to pay tax yourself, usually through Self Assessment (a summary of your income and outgoings for the year) every January. It’s worth setting something aside every time you get paid to cover tax and NI but, again, if you don’t make more than the personal allowance in profits, you won’t be taxed on your earnings.

We’re not against paying tax, by the way: taxes make social welfare possible, and ensure MPs don’t go without duck ponds.

Don’t trip up on cash

Cash-in-hand might look like a tax-free bonus but you’ll still need to declare it, and HMRC are as dogged about underpayments as a Kardashian sniffing a photo opp.

Employers who offer to pay you in cash probably take an equally flexible approach to your other working rights – be wary.

While you can (and should) ask for overpaid tax to be refunded, it works both ways. If you don’t pay what you owe – whether your mistake or an employer’s – HMRC will come calling. And they have special powers and long memories.

Income earned overseas (or online) is taxable

So you want a job but reckon you’ll give the finger to the Great British weather and take your earning power overseas for the summer? Who can blame you? Just bear in mind the tax rules still apply. Research it for yourself here, even if you’re studying abroad and don’t initially plan on working away.

If you run a business that lets you sell goods or services overseas you’ll want to look into any tax treaties to avoid owing both the UK and local governments. Online marketplaces like iStock and Amazon prompt you about this; not all do.

If you’re an international student with permission to work in the UK you’ll also need to abide by the tax rules – find out about your country’s agreements on double taxation (and see if there are any tax breaks you can get). You have the same rights to request overpaid tax as UK students.

Only taxable income is means-tested

The means-tested parts of student finance are assessed on taxable income only, so tax-free income or actual wealth won’t necessarily affect how much you get, whether it’s yours or your parents’.

For example, some students from wealthier backgrounds may still be entitled to a higher maintenance loan than other middle-income students to support their studies if their household income has fallen below the threshold in the past year (perhaps because of a redundancy) even though they still have lots of money in ISAs or other investments.

And, once you get them, most bursaries, scholarships, grants and student loans don’t count as taxable income themselves (but ask for it in writing so you know where you stand).

ISAs are the cloak of invisibility for your cash

Banks automatically tax any interest your money earns before it’s added to your account – unless you tell them not to (because you earn less than the PA, for instance). Get form R85 from HRMC to get your interest in full up-front, or R40 to request a refund.

If all that sounds like a right ‘mare, you’ll like the ISA (Individual Savings Account), a tax-free savings account for UK residents.

They’re worth it whether or not you max-out your hefty ISA allowance each year because whatever interest you earn from the money kept in them stays tax-free forever.

For extra-savvy savers, stash any spare maintenance loan or grant money in a high-interest ISA (but check for any withdrawal penalties first).

If there’s one final reason to get your head around this tax stuff it’s the big one: student loan repayments. The thresholds for repayments go by taxable income. Before you get to the payback point get to grips with taxable and non-taxable income, know how to save tax-free, understand your rights and stick to your guns. We’ll see you on the other side!

Owen Burek is editor in chief of Save the Student

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