If you’ve recently started at university, the concept of ‘tax’ is probably the furthest thing from your mind. This is a time for reading, learning, and partying, after all – surely the most complicated thing you’ll have to do is check that your student loan has come in?
Unfortunately, for many students, this is not the case: in fact, you may have to start thinking about tax sooner than you’d like. Getting your head around the ins-and-outs of tax, national insurance, and what you’ll need to pay, when, can be pretty complicated – so we’ve compiled this guide to help you get started.
When will I need to pay tax as a student?
For the vast majority of students, working alongside their courses is a necessity. If you fall into that bracket – assuming that your earnings are sufficiently high – you’ll be liable to pay some tax. However, the good news is that every UK citizen gets a ‘personal allowance’: an amount of income that is not subject to tax.
For the 2017-2018 tax year, the personal allowance has been set at £11,500 (meaning that you could earn up to £11,500 before you pay a penny). After you cross this threshold, the amount you pay depends on your earnings. You pay 20% for any amount earned between £11,501 – £45,000; and if you happen to earn anything above this amount – less likely if you’re a student, but not impossible! – you will pay tax at a rate of 40%.
If you work for a company, your employer will probably take taxes from your wages via the PAYE (‘Pay As You Earn’) scheme. Now, this is where it can get a bit tricky for students – because though some students will work throughout the year, most will work a greater number of hours during the holidays. However, the way that PAYE works is that it averages out your tax over the year, meaning that even if you have a temporary job for just one month, you will be taxed on that single pay cheque as if you will be earning that amount every month for the rest of the year.
Because the PAYE scheme works best when you are receiving income from an employer on a regular basis, it can mean that you end up overpaying tax if you’re a student, and as such will need to claim this back. It’s up to you to sort this – HMRC won’t necessarily be knocking on your door with a refund offer – and you only have four years in which you can claim, so do be sure to keep an eye on this.
A few other things to bear in mind when it comes to student taxes:
- If you’re self-employed, it’s down to you to register for self-assessment with HMRC and report your income to them on a yearly basis. You’ll then be asked to pay tax if you’ve earned more than the personal allowance amount for that year.
- Not all of the money you receive will be subject to tax – student loans, sponsorship and grants are not taxable.
How to Work Out How Much Tax You Owe
As mentioned above, there’s a good chance that you could end up overpaying tax if your working hours change throughout the year. With this in mind, it’s sensible to have an idea of how much tax you should be paying overall. For students, the calculation should be relatively simple:
- Write down your total income number – everything you’ve earned during a tax year (which runs from 6th April one year to 5th April the next).
- Take off any allowances (such as personal allowance).
- You’ll be left with a figure that equates to your taxable income.
- Use the tax rates that apply to you to calculate what your liability is (e.g. 20%, 40%, etc., as explained in the previous section).
- Take off any tax already deducted (such as the amount that would have been taken at source via PAYE – this will be stated clearly on your pay cheques).
- The amount that is left is the tax you owe, or which is owed to you.
- As an example: if you live in England and earned £250 a week during 2016-17, your total yearly income will have been £13,000. By subtracting your personal allowance (which was set at £11,000 for that tax year), you are left with your taxable income (£13,000 – £11,000 = £2,000). This falls into the 20% tax bracket, so multiply £2,000 by 0.2 to work out your liability (£400). The final step is to deduct any monies already paid for that tax year, which would provide you with a final figure. For example, if you happened to have paid £500 tax already, your final figure would be -£100, meaning that you would be due a £100 refund. By contrast, if you hadn’t yet paid any tax on the £13,000 you earned during that year, you would be required to cough up £400 at some point in the near future.
A Note on National Insurance
In the UK, if you are a student aged 16 or above and earn over £157 per week, you’ll also be liable to pay national insurance. These payments represent contributions to state benefits (such as the NHS and the state pension). For earnings between £157 – £866 per week, a contribution of 12% is due. Any earnings over that amount are charged at an additional 2%.
Most students in full-time education will be required to pay national insurance contributions, whether they are employed or self-employed. This also applies to postgraduate students who are paid for teaching, as well as placement students who earn money during work experience.
This blog is part of a series on how to handle taxes as a student or entrepreneur. Do be sure to check back regularly for more updates and handy hints from the Crowdfund Campus team!