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As an estimated 6 million people are receiving PAYE tax calculations, LITRG looks at how students in particular can find the system struggles to keep up with their working patterns.

Introduction

To help fund course fees and living expenses, increasing numbers of students are working during term time. The often erratic nature of such work, to fit in with studying, exams and so forth can leave the tax system struggling to keep up with them.

For example, you might be doing any, some or even all of the following:
 

• working in several jobs at once;
• frequently moving from one job to another;
• doing odd agency jobs; or
• doing a ‘sandwich’ course during which you work for a year.

All of this means you can pay too much tax and have to claim a refund, even if you are vigilant. There is also a risk that you might not pay enough and be presented later with an unwelcome bill. So it pays to make sure you know where you stand, try to get it right first time and, if you have paid too much, make sure you claim your refund as soon as possible.

Here we look at employed earnings, rather than income from self-employment which is a separate topic in itself.

Pay As You Earn (PAYE)

Students are, by and large, taxed in the same way as anyone else. Students working only in the vacations can still ask their employer if they can fill in a form P38S to be paid without tax deductions, but these days we understand the majority work in term time as well as vacations so cannot use this form.

Understanding how tax codes work in common student situations

Starting your first job

Your employer has to work out which PAYE code to use to deduct tax from your wages. To do so, you will be asked to provide certain ‘P46’ information, either by filling in a paper form or by passing the equivalent details direct to your employer for electronic submission. 

Depending on your answers to the P46 questions, your employer will use one of the following PAYE codes:

• one which gives you the full benefit of your personal allowance on a ‘cumulative’ basis;
• one which gives you part of personal allowance for each pay period on a ‘week 1/month 1’ basis (an ‘emergency code’);
• one which means you pay tax at the basic rate, currently 20%, on all of your wages.

If this is your first job in the tax year, you can usually tick box A on the P46, which means the first of the above applies.

The way a cumulative PAYE code works is best explained by an example:

Emily works for a single employer, but her earnings fluctuate each month depending on how much overtime she works. She is not entitled to any special allowances and has no benefits or expenses relating to her job so her PAYE code gives her only the basic personal allowance of £6,475 for 2010/11. This makes her code 647L, which is used by her employer on a cumulative basis.

So, each month from the start of the tax year on 6 April, Emily is allocated one-twelfth of her personal allowance.

She starts off in April with £540 of allowances (£6,475 divided by 12). She earns only £500 in that month, so she has £40 of allowances spare – these can be used against May’s wages.

In May, she gets another £540 of allowances, so she could earn £580 in May without paying tax. But in fact she earns only £500 again, so she then has £80 of allowances spare to use against June. Added to June’s £540 allowance, she can earn £620 that month.

But she works extra hours in June, earning £700. She only has £620 of allowances, so she has to pay tax on £80. The tax rate is 20% so her employer deducts £16 (£80 x 20%).

In July, she works fewer hours, only earning £400, but because she gets another £540 of allowances, she has £140 spare. This means the extra £80 that was taxed in June now uses up some of those spare allowances, so her employer gives her back the £16 she paid last month. She is then left with £60 (£140 - £80) of spare allowances from July to add to August’s £540 allowances.

And so it goes on throughout the year.

Moving from one job to another or taking up a job after being on benefit

When you leave a job, your employer should give you a form P45, part of which you should hand to your new employer. If your PAYE code was correct before, and used on a cumulative basis, then your new employer should keep using the same code and hopefully your tax should carry on being worked out correctly.

If you do not have a P45, you will have to provide P46 information. If you have already worked or claimed certain benefits since the beginning of the tax year, you will have to tick box B on the P46 and your employer will use a week 1/month 1 basis. So what does this mean?

You will only get a proportion of your allowances for each pay period, not the benefit of any unused allowances from earlier in the tax year. If you are entitled to the basic personal allowance of £6,475 for 2010/11, this means you will only be able to earn £124.50 a week/£540 a month before your employer starts deducting tax.

You may have unused allowances if, for example, you have had a gap between jobs. But you will not get the benefit of them until either you:

• are put back on a cumulative code (at which point you may automatically get a refund if it works out that too much tax has been deducted); or
• later claim a refund.

If you start a new job without a P45, but your former employer later gives you one (or perhaps you find it having mislaid it!), you can still give it to your new employer for them to adjust your tax code. But otherwise, you might need to keep an eye on your payslips and contact HMRC to chase up processing of your P46 to make sure you get put back on a cumulative code if it doesn’t appear to be done automatically.

Having more than one job at the same time

If you take on multiple jobs at the same time, only one should have your full personal allowance allocated against it initially. When you take on another job, you will tick box C when you provide P46 information and then that employer will be obliged to take basic rate tax at 20% from the wages he pays to you.

So, say you have got more than one small job, but over the whole tax year, your income will still be below your personal allowance – what do you do?

You can either pay the tax as you go along and later claim a refund; or, if you have a good idea of how much you are likely to earn in each job, you can contact HMRC and ask them to split your tax allowances.

Example – Janna

Janna works at a supermarket two evenings (eight hours) a week for £6 an hour, so over the course of the year she estimates she will earn £2,500 in that job.

From 1 July, she gets a job at a local bar, working at weekends for 12 hours each week at £6.10 an hour. So, by the end of the current tax year, she estimates she will have earned around £3,000 in that job.

Overall, her income in the tax year will be £5,500, so within the 2010/11 personal allowance of £6,475.
She contacts HMRC asking them to split her allowances so that she shouldn’t have tax deducted by either employer.

When telephoning HMRC as in Janna’s case, you will need:

• Personal details – such as your full name, address, date of birth and National Insurance Number;
• Details of each of your employers – their PAYE scheme reference number (which should be shown on your payslip, or ask your employer for it)
• Estimates of your earnings from each job for the current tax year.

Note that when telephoning HMRC, you should always keep a careful note of the call and its details for future reference. 

And finally, what if you have overpaid?

You are entitled to claim a refund if you have paid too much tax. Our earlier article explains how.