7 important tax facts every student needs to know
Learning the basics of tax can save you money and boost your student finances – we're here to show you how.
Waiting until you've graduated to get to grips with tax? You could be missing a trick, as well as a few quid. 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 on top of your money.
So, while the rules can be more complicated than an EastEnders love triangle, we've broken things down so you can understand the basics of tax and become an expert in no time.
What's in this guide?
Student taxes explained
When do you start paying tax?
Everyone in the UK is liable to pay tax – but only on what you earn over the Personal Allowance. To explain what this is, we should first outline how tax works in the UK.
Tax is calculated in bands, and you'll pay a different rate of tax on different chunks of your earnings.
In England, Northern Ireland and Wales, the tax bands are:
- £12,571 – £50,270 is taxed at 20% (basic rate)
- £50,271 – £150,000 is taxed at 40% (higher rate)
- Over £150,000 is taxed at 45% (additional rate).
In Scotland, the tax bands are different from the rest of the UK:
- £12,571 – £14,732 is taxed at 19% (starter rate)
- £14,733 – £25,688 is taxed at 20% (Scottish basic rate)
- £25,689 – £43,662 is taxed at 21% (intermediate rate)
- £43,663 – £150,000 is taxed t 41% (higher rate)
- Over £150,000 is taxed at 46% (top rate).
But from £0 – £12,570, every penny that you earn is yours to keep, tax-free. This is known as the Personal Allowance.
If your annual salary is £20,000, this means you'll pay no tax on the first £12,570 and 20% on the remaining £7,430 if you're a taxpayer in England, Wales or Northern Ireland. In Scotland, you'll pay no tax on the first £12,570, 19% on the £2,161 after that, and 20% on the remaining £5,268.
You're entitled to that £12,570 as tax-free income as long as your adjusted net income (more info on that here) is less than £100,000. However, for every £2 you earn above £100,000, your Personal Allowance goes down by £1. So, if you end up on a super high salary and earn £125,140+ a year, you'd have to pay tax on that full amount.
Bear in mind that your annual salary here is calculated across the tax year, which runs from April to April. If there is a change to the Personal Allowance, this will also come into effect at the start of the tax year.
What income is taxed?
There are two types of income you need to know about: taxable and non-taxable.
Taxable income includes wages, interest earned from some bank accounts and savings (usually only if it's over £1,000 a year), job perks (bonuses, expenses) and some state benefits, such as Jobseeker's Allowance.
Taxable income counts towards your Personal Allowance. So, even if you only earned, say, £12,400 a year from your job (i.e. less than the Personal Allowance), extra income of this kind could nudge you over your allowance. Even money from paid online surveys counts toward it, so be careful!
So, does Student Finance count as income? No, your Student Loans do not count as taxable income in the UK, so you don't have to pay tax on them.
Unlike taxable income, non-taxable income doesn't count towards your Personal Allowance, so don't worry about any of these tipping you over the threshold.
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. So whether it's yours, your parents, or whoever else is included in your 'household income' calculations, only include taxable income.
You can reclaim overpaid tax and National Insurance
While the system can be abused, especially by big-bucks corporations who really should 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.
Unfortunately, the system by which most employed people pay taxes (Pay As You Earn, or PAYE for short) often overtaxes students – so if it happens to you, make sure to claim tax back.
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 by getting in touch with the taxman: 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, the rules surrounding who is owed a refund are a little more complicated. If you believe you've been charged incorrectly (a common cause is that complications have arisen from having two jobs), use this government tool to find out for sure.
You could save tax if you're self-employed
And yes, being a freelancer counts as being self-employed!
Once you've checked with the taxman whether or not you're liable to pay tax, you'll need to register as self-employed with HMRC (a five-minute job) and become responsible for paying your own tax and NI.
Don't worry if your business is making a loss – only profits count towards your Personal Allowance. Profits are calculated as your business income minus legitimate business costs (advertising or equipment, for instance) – so keep scrupulous notes (receipts etc.) about both.
And remember, any cash you channel into your business is still your money, not some magical gift from the tooth fairy. There's no point in over-investing just to save on tax if it means you're losing out on pay.
As you're self-employed, you'll declare and pay tax by completing a self-assessment return (a summary of your income and costs for the year), usually each January. And as for your salary, you get the same Personal Allowance (£12,570) as everyone else.
Earn tax-free money with your savings interest
If you're earning more than you're spending, you can 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, all without lifting a finger.
Anyone in the basic rate tax band gets a tax-free personal savings allowance of £1,000, which decreases to £500 for higher rate earners and £0 for anyone in the additional rate bracket (click here for a reminder of what each band is).
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 through a savings account 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.
Open an ISA for even more tax-free interest
Back in the day, ISAs (Individual Savings Accounts) were 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 (up to £1,000 for most of you) without paying tax, some people have questioned whether ISAs are worth having anymore.
It's a reasonable thing to ask, but there are a few factors 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), but ISAs are always tax-free. So, if you think you'll be a high-earner 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!
Lifetime ISAs are especially good for extra free money. Although you can only use them to save for a house or retirement, you could earn up to £1,000 in bonus payments every single year, up to a total of £33,000.
ISAs aren't all rainbows and sunshine, though – there can often be a penalty for withdrawing your money before the set term is up and, depending on how much you're saving, they could have a far worse interest rate than a current or savings account.
The tax rules can boost your Student Finance
We touched on it earlier, but it bears repeating: if you're applying for Student Finance, remember that only taxable income is means-tested. You could lose out on a chunk of Maintenance Loan if non-taxable income is included in your calculations, so make sure your folks are aware of this 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.
Tax mistakes to avoid
Now you've learned the basics of what you should be doing with tax, here are some simple tax mistakes to avoid:
- 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 still 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 rights as an employee, 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.
You've mastered tax – now it's time to get on top of the rest of your finances by cutting out these common money mistakes.