Understanding tax responsibilities is important for students, both during their studies and after completing a degree and entering full-time employment. Here’s a straightforward outline of a student tax guide in the UK.
During Studies
Income Tax:
Most students working part-time won’t need to pay income tax if their earnings are below the personal allowance threshold, which is £12,570 for the tax year 2022/23.
Ensure your employer knows you’re a student and applies the correct tax code (usually ‘BR’ or ‘0T’) to your earnings.
National Insurance Contributions (NICs):
Students earning above £184 a week (£797 a month) are required to pay NICs.
Students under the age of 21 are exempt from NICs up to the ‘Upper Secondary Threshold’ (£967 per week or £4,189 per month).
Tax-Free Allowances:
Students can benefit from tax-free allowances on interest earned from savings, dividends, and certain benefits.
Make sure to declare any income earned from savings interest or dividends on your tax return if it exceeds the annual allowances (£1,000 for savings interest and £2,000 for dividends for the tax year 2022/23).
After Completing a Degree and Employed Full-Time
Income Tax:
Once employed full-time, you’ll likely pay income tax through the Pay As You Earn (PAYE) system.
The amount of income tax you pay depends on your total earnings and tax code, with tax rates ranging from 20% to 45% for the tax year 2022/23.
National Insurance Contributions (NICs):
Full-time employees are subject to NICs on their earnings, which are deducted automatically through the PAYE system.
NICs rates vary depending on your earnings, with different thresholds and percentages for Class 1 NICs.
Student Loan Repayments:
If you have a student loan, repayments are deducted automatically from your salary once your earnings exceed the repayment threshold (£27,295 for Plan 2 loans for the tax year 2022/23).
Student loan repayments are calculated as a percentage of your earnings above the threshold, with rates ranging from 9% to 16%, depending on your income.
Tax Credits and Benefits:
You may be eligible for tax credits or benefits depending on your circumstances, such as Working Tax Credit, Child Tax Credit, or Universal Credit.
Check your eligibility and apply for any applicable credits or benefits to supplement your income.
Pension Contributions:
Consider joining your employer’s pension scheme to save for retirement and benefit from tax relief on your contributions.
Pension contributions can reduce your taxable income, potentially lowering your overall tax bill.
Keep Records and Stay Informed:
Keep accurate records of your earnings, expenses, and tax-related documents, such as payslips and P60s.
Stay informed about changes to tax laws and allowances to ensure you’re managing your finances effectively and maximising tax efficiency.
By understanding your tax responsibilities and taking proactive steps to manage your finances, you can navigate the tax system with confidence and make informed decisions about your income and expenses both during your studies and throughout your career.