Students And Tax – What You Need To Know

Sarah Bradford takes a look at what students may need to know about tax and National Insurance.

In the excitement of starting at University, it is probably fair to say that tax is not at the forefront of most students’ minds! However, a little knowledge of how the tax system works and how it may affect you as a student can be useful.

Having negotiated the student finance maze, as the start of term approaches thoughts are more likely to revolve around when grants and loans will be received rather than on the mechanics of paying it back. The Government’s student’s finance package comprises three different elements:

The maintenance grant is means tested and is not given where household income exceeds £42,620. The maintenance loan is partially means tested and regardless of household income students are eligible for a non-means tested loan of 65% of the maximum amount. The maximum loan depends on whether they live with parents, or study inside or outside of London. Students may also be eligible for a special support grant if they are on income support or receiving housing benefit.

Students may also receive bursaries or scholarships from their university.

The maintenance and special support grant are not taxable; nor is a university bursary or scholarship.

Interest is charged on the tuition and maintenance loans, which are repayable. The repayments are linked to the student’s income and the loans are repaid at a rate of 9% on income in excess of £21,000.  Normally the repayments are collected by the employer under the PAYE system. 

Many students work during holidays and part-time during term time to supplement their student loan and any maintenance grant. The tax system applies to students as to any other employees. The old rules on students working in the holidays no longer apply, and students who earn more than £192 a week or £833 a month will need to pay income tax. They will also pay Class 1 National Insurance contributions when earnings exceed £153 a week.

The tax code is the mechanism by which employee’s receive the benefit of their personal allowance – set at £10,000 for 2014/15. Most students will not have any deductions from their allowance and will have the standard tax code for 2014/15 of 1000L. When starting work it is sensible to check that your tax code is correct, as if it is wrong you may pay too much or too little tax. In particular, check that you have not been put on a 0T code, which may be the case if you start work without a P45, as this will mean that you are not getting the benefit of your personal allowance and being taxed on every penny of your income.

Many students work sporadically, for example only during holidays or during term time outside of exam periods. Where a student stops working part way through the year, they may overpay tax as the benefit on the personal allowance is given on a pro-rata basis.  

In some cases, the tax overpaid may be repaid automatically via the tax code if the student starts working again and is employed at the end of the tax year, and the refund will be paid back as part of their pay. Otherwise, the overpaid tax can be reclaimed by writing to HMRC. Students on low income with savings income may also be able to claim back tax deducted from their savings by completing form R85.

Students who live and study in the UK and who work abroad in the holidays may also need to pay UK tax on their earnings abroad, and also National Insurance contributions if you work for a UK employer. However, you will usually receive credit for any foreign tax paid.