6 basic tax facts every student needs to know
Getting to grips with tax can save you money and boost your student finances – we're here to show you how.
Credit: Alan Cleaver – Flickr.comLeave tackling this tax stuff until graduation and you could be missing a trick. Knowing how tax works now can help you maximise your earnings, get more from your savings, and ensure you’re not stiffed on student finance.
Once you get the gist of it, you can apply these principles to the rest of your working life to stay quids in and in control.
Unfortunately, tax rules can be more complicated than a Hollyoaks love triangle. This article is a broad guide to income tax – you’ll need to supplement this with your own research.
What’s on this page?
Everyone in the UK is liable to pay tax – but only on anything they earn over the personal allowance.
Income tax is a little like selling your used books on Amazon: you can make money doing it, but you’ll have to pay the site a commission. The personal allowance is like Amazon not charging you commission on your first few sales. Dog-eared copy of Twilight, anyone?
In financial terms, the personal allowance is updated at the start of every tax year (which runs from April to April) and, for 2017/18, is worth £11,500. In other words, the first £11,500 you earn in the financial year is tax-free.
If you do earn more than the personal allowance you’ll pay income tax on the difference. Everyone pays basic rate tax (20%) on anything between the personal allowance and around £45k, with higher rates on anything over that if you’re a proper Daddy Warbucks.
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There are two types of income you need to know about: taxable and non-taxable.
Taxable income includes wages, interest (over £1,000 a year) from some bank accounts, job perks (bonuses, expenses) and some State benefits, such as Jobseeker’s Allowance.
Taxable income counts towards your personal allowance – so even if you don’t earn very much, extra income of this kind could nudge you over your allowance.
Non-taxable income includes your student finance package and most bursaries, grants and scholarships. It also includes other state benefits, such as Child Tax Credits or Disability Living Allowance, as well as interest from ISA savings accounts. This type of income doesn’t count towards your personal allowance.
Now you know the difference, here’s where you make it pay for you: only taxable income has to be declared when applying for means-tested funds, including student finance. That goes whether it’s yours, your parents, or whoever counts in your ‘household income’ calculations.
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While the system can be abused, especially by big-bucks corporations and MPs who really ought to know better, paying tax and National Insurance (NI) is a good thing. It pays for social welfare (benefits, the state pension and the NHS), which is why it’s usually taken out of your wages before you get paid.
Unfortunately this 'Pay As You Earn' scheme typically overtaxes students.
Get into the habit of checking your payslips to see what you’ve earned, for how many hours, and with what deductions. And, if you’ve paid too much tax, ask for it back. Use our tax calculator, or get in touch with Her Madge’s tax collector, HMRC.
The rules about paying and reclaiming income tax apply to both UK and international students – but check the deets for yourself at your local tax office.
As for national insurance, you cannot claim it back if you've earned below the threshold but you can if you believe you've been charged incorrectly (eg. you had 2 jobs where you paid class 1 NICs at the same time).
If you run a business that nets you an income – whether it’s proofreading student essays or walking neighbourhood pooches – you’ll need to check for yourself whether it counts as a trade in the tax man’s eyes.
If it does, you’ll need to register as self-employed with HMRC (a five-minute job) and be responsible for paying your own tax and NI.
Only profits count towards your personal allowance. Profits are calculated on business income minus legitimate business costs (advertising or equipment, for instance) – so keep scrupulous notes about both.
Don’t forget that any cash you chunnel into your business is still your money, not some magical gift from the tooth fairy. There’s no point over-investing just to save on tax if it means you’re losing out on pay.
You declare and pay tax through an annual Self Assessment (a summary of your income and costs for the year), usually each January.
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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 personal allowance, for instance). Get form R85 from HRMC to get your interest in full up-front, or R40 to request a refund.
Alternatively, get yourself an ISA (Individual Savings Account), which lets you earn tax-free interest on up to £20,000 a year. They’re open to UK residents over 16 and are a great deal for students because whatever interest you earn and keep in them stays tax-free year after year.Did you know the new Lifetime ISA will launch in April 2017? We have all the details for you here.
If you can afford it, stash any spare grant or loan instalment money in an ISA to kick-start your savings (although check for any withdrawal penalties if you need to access your cash later on).
There’s more info about the best cash ISAs for students here.
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If you’re applying for student finance, don’t forget only taxable income is means-tested. You could lose out on cash if non-taxable income is included in your calculations (make sure your folks know, too).
Once you’ve got funding, bursaries, grants and scholarships are usually tax-free (along with student loan money) – they won’t count towards your personal allowance or affect any other means-tested money you want to apply for, such as benefits. Always get it in writing, though, to know where you stand.
If you made it this far and still aren’t convinced this tax stuff applies to you, here’s the big one: the thresholds for student loan repayment are based on taxable income. Before you get to that point, get to grips with taxable and non-taxable income, know how to maximise tax-free savings, and make sure you’re primed for payback. Let us know how you get on!
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- You may need to pay tax on money you make online. If you just sell a few books occasionally you probably won’t need to pay tax. If you find you’re buying stuff to sell on, you’ve probably wandered into trading – see our section on self-employment to get to grips with this
- Money earned oversees is taxable. If you sell goods and services overseas (iStock, for instance), you may also have to pay tax to other countries. Some sites will prompt you about this, but not all do. Find out about any tax treaties going to avoid being taxed twice (this also goes for international students able to work in the UK).
- Cash isn’t tax-free money: it’s not legit for employers to pay you without deducting tax and NI. Folk that want to pay in cash are also likely to skimp on your employee rights, too – so be cautious. If you earn cash, keep notes and be prepared to declare it in a tax return.
- While you can and should claim back overpaid tax, remember that it goes both ways – if you don’t pay enough tax, HMRC will, eventually, want it back. They’re like the mounties of the financial world: they always get their man. Make sure you know the rules and how to rock ‘em.
Now you're armed with the tax facts, are you ready to start making some money?