I am a student at college or university. How can I be paid wages without paying tax?
(If you are a student on a course outside of the UK but working in the UK during your holidays, see Students on courses abroad, below.)
There is a common misconception that students can be paid wages without paying any income tax. This is not true. If you are a student, your earnings are liable for income tax and National Insurance contributions (NICs) in exactly the same way as any other employee.
Every employee is entitled to a personal tax allowance, i.e. an amount of earnings in a tax year that is not subject to income tax. It is called your “tax-free pay” (see What does my tax code mean?). During the tax year that starts on 6 April 2009, you are entitled to £6,475 of tax-free pay.
Normally an employee receives a portion of that tax-free pay on each payday throughout the year. For example, an employee who is paid weekly receives about £124.50 of tax-free pay each week. That arrangement applies equally to students who do paid work during both term time and holidays.
A special arrangement applies to students if they only work during their holidays from college or university, i.e. during the Easter, Summer and Christmas breaks. If you are in this situation and you do not do any paid work during term time, HM Revenue & Customs (HMRC) allows you to have all of your tax-free pay “up-front” rather than in instalments. The concession is made because you are unlikely to earn more than the personal tax allowance during your holidays in the tax year. It avoids the need for you to reclaim tax from HMRC at the end of the tax year.
This means that, if you can sign a legal declaration that you meet certain very specific conditions, your employer can pay you without deducting tax from your wages. Your employer should give you a form P38(S) to complete. The conditions for using this arrangement, as printed on this form, are as follows:
- You must be a student and give the name of the school, college or university that you are attending.
- You will be attending that school, college or university until after the end of the current tax year.
- You do not have any employment during the tax year other than during your holidays. That refers to employment with any other employer, not just the one for whom you are currently working during your holidays.
- Your total earnings for the tax year from the employer for whom you are completing the form, and from any other employer, and from any other source, and any Jobseekers Allowance paid for unemployment, will not exceed £6,475.
Therefore, you may not use this arrangement if
- your course ends before the end of the current tax year, e.g. in the summer holidays following the completion of your course, or
- you do paid work of any kind, including self-employment, during term-time, or
- you know that your earnings from all sources will exceed £6,475 for the tax year.
When making the declaration on form P38(S), you will have to provide your National Insurance number, your date of birth and your home address. You must sign and date the declaration.
Your signed declaration allows the employer to pay you for the work you perform during the holiday periods without deducting any income tax from your pay. Your employer will use tax code NT (i.e. “no tax”) to achieve this. Note, however, that this arrangement does not apply to National Insurance contributions (NICs). If you earn more than £124.50 per week, your employer will deduct NICs from your wages.
Although you may not expect to earn more than £6,475 during your holiday periods, your employer must end this special arrangement if your earnings in the tax year reach that level. At that point, you have received all of your tax-free pay for the year. Your employer will change your tax code to 0T and you will pay tax at the appropriate rate on all of any further wages you are paid.
Students on courses abroad
The arrangement described above, involving the completing of form P38(S), also applies if you are a student on a course abroad and you are working in the UK during your holidays, and you are
- a national of a country in the European Union and you complete a form P38(S) issued to you by the UK employer, or
- a student sponsored by an approved organisation that has issued you with form P38(S). You will also be required to show the UK employer your passport or registration card. The passport or registration card number must also be written on the P38(S).
More FAQs Related to Tax Codes
What does my tax code mean?
What does the letter at the end of my tax code mean?
What does the “X” (or “1″, or “W1″, or “M1″) after my tax code mean?
How does my employer know my tax code when I didn’t hand in a P45?