If you are a student who finds it difficult to understand the PAYE tax system, you are not alone. There is a great deal of confusion around student taxes amongst the UK student population, but it need not be complicated. This article will take a look at the truths – and not-so-truths – behind paying tax as a student. Placement year students and interns will find the following to be particularly useful.
First up, let us dispel the myth that students are in some way automatically exempt from paying income tax – this is simply not the case unfortunately. The confusion here is most likely attributable to the fact that students very rarely earn enough to need to pay tax – but it is untrue to say that a student would never have to pay tax at all. Whether students do, or do not, have to pay tax will be determined by their income relative to the annual tax free income amount (which is known in the tax world as the Personal Allowance).
The fact is that the vast majority of students do not nearly earn enough to exceed this annual tax-free income allowance, and thus have to start paying tax through PAYE, because the rate for UK residents under the age of 65 this year is £7,475.
This means that, in essence, any tax paid by a student who earns less than £7,475 during the tax year (which runs from April 6th each year) has almost certainly been paid in error. The statistics are nauseating however when we consider just how many students end up paying tax – needlessly – each year.
There are a couple of common root causes behind student tax errors, which we will now explain. The most common reasons for paying too much tax as a student – and this type of overpayment is often by several hundreds, if not thousands, of pounds, occurs where students leave a full-time job (such as a work placement or industrial placement, or a summer internship) to return to full-time study and do not work again before the tax year ends the following April.
Similarly, many students unwittingly pay too much tax because they – for whatever reason – are placed on an incorrect tax code. This is a particularly common situation, which tends to arise where students have held down multiple jobs (perhaps in sequence, or perhaps simultaneously) throughout the tax year. HMRC is notorious for its bureaucracy and unfortunately your annual tax-free income allowance (also known as the Personal Allowance) is only ever applied to one job (typically your first job after April 6th – the start of the tax year. Your second, third or fourth jobs do not receive any tax free allowance so if you start a second job (say a summer internship or perhaps a full time placement at the end of summer) then you are unlikely to be in receipt of a full £7,475 tax free income allowance. Because of this, you’ll be paying an emergency tax rate (usually around 20%!) and will therefore have overpaid your tax by a significant amount. Check your tax codes for a ‘BR’ coding note – this will indicate that you are paying ’emergency tax’ at the full 20% rate.
Industrial placements, placement years, and summer internships, are three of the major causes behind students paying too much income tax. This situation arises because HMRC, with their primitive systems, has to make certain assumptions about your income when you start a new job. One of these assumptions is that whatever your income, you will continue to earn the same amount each month until the end of the tax year. Summer interns therefore run the risk that HMRC will think your well-paid summer job is going to last through to April next year. Equally, placement year students who are in the final stint of their placement, and finishing in the Autumn, will be logged at HMRC as likely to continue that particular role through to the end of the tax year at the end of the following April.
In both cases, you will not be continuing your employment – and likewise, in both cases, this mistake on HMRCs part is almost certainly going to result in an overpayment of tax by you, the student.
The big question of course is how to get a student tax refund
If you have graduated since April 2005, or if you are still a student, you could well be owed a tax refund from HMRC. Placement year students and summer interns are particularly at risk – especially if you returned to studying full-time and did not have any paid employment after your placement ended.
The annual tax-free income allowance is currently £7,475 per annum – so if you earned less than this during the internship (or after April 6th if you completed a work placement) then you are almost certain to have paid too much tax.