As you know throughout this month we have been doing our best to help out students who are starting their university journey.
This week, we have decided to focus on tax as this can often be a grey area for students as you probably have never had to pay tax before!
And of course, once you know the tax rules they will come in useful for the rest of your working adult life.
1. You can make tax-free money with an ISA
Banks automatically tax any interest on your money before its added to your account – unless of course you tell them not to because you might earn less than the personal allowance. To claim this back you will need a form R40 from HMRC.
However, if you open an Individual Savings Account (ISA) anything up to £20,000 will not be taxed. So if you have any spare money from your student grant, it might be a good idea to put this away in an ISA. Make sure you check the withdrawal fees before opening one, so you are not charged if you want to take out your money.
2. Not all income is created equal… I mean taxed!
There are two types of income you need to know about - one is taxable the other non-taxable.
Your taxable income includes wages, interest (over £1,000 a year) from some bank accounts, job perks (bonuses and expenses) and some state benefits such as Jobseeker’s allowance. All of these count towards your personal allowance so even if your part time job does not pay much it all adds up to your allowance. Any income over your personal allowance which is currently £11,500 is subject to tax.
Non-taxable income is your student finance and most bursaries, grants and scholarships you will receive throughout your years at university. It also includes a majority of the state benefits such as Disability Living Allowance or Child Tax Credit as well as interest from ISA savings accounts (up to £20,000).
When you apply for your student finance, you only have to declare any taxable income whether it is your income, your parents or whatever will count in your ‘household income’ calculations.
3. You only pay tax if you earn enough money
As obvious as this might be, not everyone is sure on when you actually pay tax. Every single person in the UK is liable to pay tax on taxable income over the personal allowance. Your income tax is a little bit like when you pay a fee to sell something on eBay or Amazon, yes, you make money but you have to pay the site a commission. So your personal allowance is like eBay saying ‘we won’t charge you commission until you make x amount of money’.
The personal allowance is updated at the start of every tax year – a tax year runs from April to April – and as mentioned in point 2 for the year 2017/18 it is £11,500. This means anything up to £11,500 will not be taxed. Any taxable income over £11,500 will be charged at the basic rate of tax (20%) which applies to anything between £11,500 to £45,000, once you earn over £45,000 the tax rate is higher.
4. You can claim back overpaid tax
It is a good thing to pay tax as our contributions pay for many of our public services.
Sadly the ‘Pay As You Earn’ scheme typically overtaxes students. This is due to the fact your income will probably vary. You might earn less during busy times of the year and get taxed less and more at times where you are less busy studying therefore get taxed more.
Get into the habit of checking your payslips to see how much tax has been deducted and if it feels like you are paying too much simply call HMRC to ensure they have the correct information and see if you might be paying too much.
5. The tax rules can boost your student finance
When you are applying for your student finance don’t forget only taxable income is means-tested. You can lose out on a lot of money if you include non-taxable income in your cancellations (or your parent’s calculations).
Once you’ve got funding, bursaries, grants and scholarships they are all usually tax-free along with student loans and they will not affect any other means-tested money you might want to apply for such benefits (if you are in a situation where you need these).
Hopefully you now have a better idea about paying your taxes. Make sure you read our other guides so you are set for your time at university: