7 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.
Think you'll wait until you've graduated to figure out this tax stuff? You could be missing a trick. Knowing how tax works can help you maximise your earnings, get more from your savings, and ensure you're the master of your Student Finance.
Once you get the gist of it, you can apply these principles to the rest of your life to stay quids in and in control.
Unfortunately, tax rules can be more complicated than an EastEnders 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?
Student tax facts explained
You only pay tax if you earn enough
Everyone in the UK is liable to pay tax – but only on what you earn over the personal allowance.
Income tax is a little like Tinder (bear with us) – you get a set number of swipes each day, but then you have to pay to get more. With income tax, you can earn up to a certain amount without paying tax – when you earn more than the threshold, you start paying tax.
In financial terms, the personal allowance is updated at the start of every tax year (which runs from April to April), and in 2019/20 it's £12,500. In other words, the first £12,500 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 threshold and £50k, with higher rates on anything over that if you’re the world's richest student.
Not all income is taxed
There are two types of income you need to know about: taxable and non-taxable.
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. Even money from paid online surveys counts toward it, so be careful!
Non-taxable income includes your Student Finance package, as well as most bursaries, grants and scholarships. It also includes other state benefits, such as Child Tax Credits or Disability Living Allowance, plus 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 applies whether it’s yours, your parents, or whoever is included in your ‘household income’ calculations.
You can reclaim overpaid tax and National Insurance
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. NI 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.
Get into the habit of checking your payslips to see what you’ve earned, for how many hours of work, 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.
You could save tax if you’re self-employed
If you run a business that earns you an income – whether it’s proofreading student essays or pet sitting – you’ll need to check for yourself whether it counts as a trade in the tax man’s eyes. And yes, being a freelancer counts as being self-employed!
If this applied to you, 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 channel 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. And remember, as for your salary, you get the same personal allowance (£12,500) as everyone else.
You can make tax-free money with your savings interest
If you're earning more than you're spending, you should start putting your extra cash to work. By placing it in a savings account, you could potentially earn tens – if not hundreds – of pounds in interest each year without lifting a finger.
Anyone in the basic rate tax band (taxable income under approximately £50,000/year) gets a tax-free personal savings allowance of £1,000, which decreases to £500 for higher rate earners (taxable income between approximately £50,000 – £150,000/year), and £0 for anyone in the additional rate bracket (taxable income over £150,000/year).
As a student you'll almost certainly be in the basic rate bracket, meaning you can earn up to £1,000 of interest without having to pay any tax on it! Earning this much interest in a year is almost impossible (especially as a basic rate taxpayer), so effectively all your interest will be tax-free.
Check out our guide to the best student savings accounts to see where you should be putting your spare pennies.
Consider an ISA for even more tax-free interest
Back in the day, ISAs (Individual Savings Accounts) used to be the only way to earn tax-free interest on your savings. However, since the rules were changed to allow most people to earn a fair whack of interest without paying tax, some people have questioned whether ISAs are worth having anymore.
It's a reasonable question to ask, but there are a few things worth bearing in mind. First and foremost, the tax-free interest allowance could change (or be removed) in the future. It's only been in place since 2016, so you shouldn't assume that these things are set in stone.
Secondly, if you're lucky enough to be a high-earner, an ISA could be your best shot at earning tax-free interest. Remember that higher rate taxpayers only get £500 of interest tax-free (it's £0 for additional rate taxpayers), so if you think you'll be accumulating that much now, or in the near future, opening an ISA might be a wise idea.
You can put up to £20,000 into an ISA every year, so if you've somehow got that much going spare that often, you could amass £200,000 of savings in 10 years, with all of the interest being completely tax-free. Unrealistic, perhaps, but an example of why the ISA still has its place!
ISAs aren't all rainbows and sunshine, though – there can often be a penalty for withdrawing your money, and depending on how much you're saving, could have a far worse interest rate than a current or savings account.
The tax rules can boost your Student Finance
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).
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 repayments are based on taxable income.
Top tax pitfalls – and how to avoid them
- 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 overseas is taxable. If you sell goods and services overseas (like selling photos online, 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 reverse Lannisters – they always make sure you pay your debts. 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?