This page gives a brief overview of tax and national insurance issues for students, with more detailed information available from the links below.
Income Tax
Income tax is charged on all assessable income in a tax year, which runs from 6 April to 5 April. Everyone resident in the UK has a personal allowance, an amount they can earn before any tax becomes due. In the 2010/11 tax year, this is £6,475 and in the 2011/12 tax year this will be £7,475.
If you do not earn over the personal allowance you do not have any income tax to pay. If you do earn over this amount, the additional amount will be taxed at 20% initially, with much higher incomes eventually taxed at 40% and 50%. Small amounts of income from interest on savings will be taxed at 10%.
Student grants and bursaries and nearly all scholarships will be tax-free. In certain circumstances private scholarships may be taxable, and it is best to confirm that such payments are tax-free.
Tax is collected either via your employer in a system known as Pay As You Earn (PAYE), or through the self-assessment process if you are self-employed.
Overpaying tax
About 80% of full-time students who work do not exceed their personal allowance in the year. However, due to the way tax is calculated students can overpay tax.
This is because student income often varies considerably during the year. For example, you might work full-time during the summer vacation, and then only part-time or not at all during term. Therefore, although your overall earnings do not exceed your personal allowance, or only do so by a small amount, tax may be deducted in the summer on the assumption that the earnings will continue for the full tax year.
If you have overpaid tax you can reclaim it, and you can do so up to six years after the tax year for which you are reclaiming.
Reclaiming overpaid tax
If you believe you have paid too much income tax you can apply for a refund. This is done through your local tax office and is relatively straightforward. You might need proof of your earnings, such as P60 or P45 forms from your employer.
Some private companies will offer to reclaim tax for you, but will take a cut of any refund that is due – often around 20%. NUS always recommends that students or graduates apply themselves for tax refunds as this is money you have earned and is due to you, and the process is not complex.
National Insurance
In addition to income tax, national insurance may also be deducted from your earnings. National insurance contributions help to pay for certain benefits, including the state retirement pension.
If your earnings from paid work exceed £110 per week (rising to £136 per week in the 2011/12 tax year) you will pay national insurance at a rate of 11% of earnings above the limits. Earnings above £844 per week attract a 1% rate.
As with income tax, students are in no special position regarding national insurance, and national insurance contributions will not be deducted from student grants and loans.
For more information on national insurance, see the links below.
Further information