PAYE Procedures for Students – Initial information about changes from April 2011Wednesday, July 15th, 2009
In March 2008, HMRC published a consultation document entitled Modernising PAYE Processes for Students. It addressed concerns that, as a result of changing student work patterns, the P38(S) procedures may no longer address the needs of most working students. In particular
- only about 20% of students earn enough in a tax year to pay tax
- many students have several different jobs during a tax year
- many employers do not use the P38(S) procedures because they are seen as cumbersome and they use normal PAYE procedures for students instead.
The effect is that a growing number of students are over-paying tax on their employment income and having to claim repayments during the tax year or at the year-end.
The consultation put forward three options for change, all of which involved scrapping the P38(S) and removing the current distinctions between (1) work performed during term-time and during holidays and (2) between work performed during courses running during part tax years and full tax years. The new procedures would apply to all working students over the age of 16 who are attending or studying with a school, college or university full-time (and would include therefore sixth-form students), and who do not expect to earn more than the personal allowance in the tax year.
For the principal benefit of payroll system developers, HMRC has provided advance information on how the new procedures are expected to operate. They will involve the use of a new PAYE tax code from April 2011, as follows:
- all versions of form P46 will be amended to provide a student declaration, that the student expects to earn less than the personal allowance for the year, without a requirement for the employer to validate it
- if the student does not sign the declaration, normal PAYE procedures will apply
- the new tax code will operate by deducting tax only when the annual value of the personal allowance is exceeded, for example a code of “647D” would apply week 52/month 12 values each payday
- NICs will be calculated using normal rules.
HMRC will continue to consult on the proposals, including aspects that require further consideration, such as changes of employment after the student code has been allocated, and how to allocate a code to an existing employee who becomes a student.
Notes for Payroll Software Developers (July 2009)
The UK Payroll News is sponsored by HRD & Payroll Solutions