Home
When and how are the P38(S) procedures used for student employees?
Monday, September 13th, 2010
Recommend on Facebook-
- Share on Linkedin
- share via Reddit
- Tweet about it
- Subscribe to the comments on this post
- Print for later
- Tell a friend
Special tax provisions are made for students who are employed only during their between-term holidays, including UK nationals who are studying abroad and who return to the UK to work during their holidays. If the student does not produce a P45 and the requirements (as described below) are met, the employer must provide form P38(S) Student Employees for the student to complete and sign. This allows the student to be paid without deduction of income tax, irrespective of the earnings. However, NICs must still be deducted as appropriate.
Where an employer’s circumstances make it more advantageous, e.g. in a business with many sites but a centralised payroll department, the employer may obtain the P38(S) information electronically rather than using the paper form. All of the procedures are otherwise the same. In place of the student’s signed declaration, the employer must be able to demonstrate, in the event of an HMRC audit, that the information originated directly from the student. The procedures described below are written as if it is the paper form that is being used.
The special arrangement for such students is built around the premise that, because they do not work at all during term-time, their earnings in the tax year are unlikely to exceed the personal tax allowance for the year. By not taxing their income, the procedure prevents the need for them to have to claim a tax refund after the end of the year. The arrangement does not imply, however, that students are exempt from tax. If a student’s earnings in the holiday period or periods during the tax year reach the tax threshold, income tax must be deducted from any further earnings without any tax free pay as the full personal tax allowance has already been used up.
Even if a student qualifies to be paid without deduction of tax, NICs must still be calculated if the earnings in any earnings period exceed the LEL. HMRC’s instructions are that code “NI” should be used where NICs are deducted but not income tax. However, computerised payroll systems commonly use tax code “NT” whether or not earnings are such that NICs must be deducted.
The P38(S) procedures may only be applied if there is no intention for the employment continuing outside of the holiday period and the student:
- did not produce a P45 on starting the job
- is attending a college or university and this is named on the form
- is on a course that will continue beyond the end of the current tax year
- has no employment of any kind except during holidays
- has total income from all sources that does not exceed the tax threshold for the year (i.e. £6475 for 2010/11).
The arrangement cannot normally be used in the final year of a student’s course because the academic year finishes part way through a tax year.
If a student starts the employment during a holiday period but the intention at that time is for the employment to continue into term-time, the P38(S) procedure may not be used. Normal P46 procedures should be followed.
Where all of the conditions are met
It is the student that signs the declaration and, as a result, the employer is not required to police the student’s circumstances unless it is clear that the declaration is fraudulent. As long as the student works only during holiday periods and the total earnings in the employment do not exceed the tax threshold for year, the employer may continue to use the P38(S) arrangement. However, a number of situations can arise that require the employee to complete a form P46. These situations are explained at the end of this article.
A P38(S) is completed for each tax year during which the conditions can be met. The same form can cover any or all of the holiday periods in the tax year. If a student works in the Easter holiday period and it spans two separate tax years, two P38(S) forms must be completed, one for each tax year.
The P38(S) form changes annually to reflect the current year’s tax threshold and only the latest form should be used. A form produced by the student should never be accepted, other than where the employer provides a secure means by which the student can provide the information electronically.
When the employee leaves at the end of the holiday period, no P45 should be issued.
At the end of the tax year, the employer completes the statement on the back of the P38(S), entering the total pay for the student and the dates of the employment. All P38(S) forms should be retained by the employer for audit purposes for at least three years after the year to which they relate.
There is no statutory requirement to complete a P14 End of Year Summary for an employee for whom the employer holds a P38(S) for the tax year. However, employers with computerised payroll systems normally put students on the payroll so that, even though tax is not deducted, NICs are automatically deducted as appropriate. A P14 produced for a student in these circumstances may be submitted with all other P14s. The P38(S) must still be retained, as above.
Where the conditions cease to be met
Where all of the conditions required to operate P38(S) procedures are initially met for a student but subsequently fail to be met, the employer must use modified P46 procedures. It is important to enter on the P46 the actual code that the employer has decided to use, based on the guidance below. In all of the situations described below, where the student has completed a form P46, a form P45 should be issued when the employment ends.
Earnings exceed the tax threshold. Employers should monitor the earnings paid to students and, where a student’s earnings will exceed the tax threshold at the next payday, the student should be given a form P46 to complete. It should show the date on which the current employment started, not the date on which the tax threshold is exceeded. If the employee ticks
- Statement A or B, tax code 0T on a W1/M1 basis should be operated (not the current emergency tax code)
- Statement C, tax code BR on a W1/M1 basis should be operated.
If the employee does not complete a P46 or does not provide the necessary information, the P46 should be completed by the employer and tax code BR on a W1/M1 basis should be operated.
The tax code used should be entered in the employer’s section of the P46. The employer’s tax office should be informed that tax is being deducted in a P38(S) case. The year-end P14 should include the earnings when the P38(S) procedures were being used and the earnings subsequently.
Employment continues into term-time. As soon as there is agreement for the employment to continue beyond the holiday period, the student should be given a form P46 to complete. It should show the date on which the current employment started, not the date on which term-time working starts. If the employee ticks
- Statement A or B, the emergency tax code on a W1/M1 basis should be operated (in either case)
- Statement C, tax code BR on a W1/M1 basis should be operated.
The year-end P14 should include earnings when the P38(S) procedures were being used and the earnings subsequently.
If the employee does not complete a P46 or does not provide the necessary information, the P46 should be completed by the employer and tax code BR on a W1/M1 basis should be operated.
Employment ends and resumes later in term-time. If a student leaves at the end of the holiday period but returns to work during term-time after a break, the student should be given a form P46 to complete. It should show the date on which the new employment started. If the employee ticks
- Statement A (strictly incorrect) or Statement B, the emergency tax code on a W1/M1 basis should be operated (in either case)
- Statement C, tax code BR on a cumulative basis should be operated, on the earnings in the new employment only.
If the employee does not complete a P46 or does not provide the necessary information, the P46 should be completed by the employer and tax code BR on a cumulative basis should be operated.
The employer is asked if possible to submit a year-end P14 for each period of employment.
