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TaxationWeb by Kate Stephens ACA, ATII

ATTENTION STUDENTS! There are easy planning steps that can be taken by you and your parents to take advantage of tax reliefs and exemptions available and to increase the amount of cash in your hands. Tax specialist Kate Stephens ACA ATII of tax advisors Forbes Dawson outlines some tax planning ideas.This article outlines easy planning steps that can be taken by you and your parents to take advantage of tax reliefs and exemptions available and to increase the amount of cash in your hands.

Students have long been neglected by the Government (Their source of information for students - Leaflet IR60 ‘Income Tax and Students’ is out dated and even misleading) and students often end up paying too much tax.

According to an Office of National Statistics survey nearly 70% of people under the age of 20 will be students by 2006. Of these 53% are expected to also be working.

1. Basics of the UK Tax System

We are fairly unique in the UK in that we have a tax year that runs from 6 April to the following 5 April. This means, when assessing how much tax you will pay you look at income and gains arising in that period.

Generally tax is then payable to the Inland Revenue by the end of the following January. For example, tax on income for the year ended 5 April 2003 will be payable by 31 January 2004 (an exception is when tax is deducted at source before you receive it, eg through the PAYE system on wages or income tax deducted by banks on interest income).

Generally, each person is taxed on their own income and every individual is entitled to a tax-free allowance each year. There are, however, special rules that come into effect when assets are given by parents to their children under 18 years old that result in the parent being taxed on the children’s income.

National Insurance is also payable on income you received from working, whether you are self-employed or employed. Again there is a lower limit below which you will not need to pay National Insurance.

2. Supplementing Your Income

Part-time work

For holiday working it is possible for you to receive your wages without deduction of income tax or National Insurance. If your total income is less than your tax-free personal allowance for the year (£4,615 for 2002/03) then you can simply complete a form and receive your cash tax-free.

Unfortunately it is your responsibility to ask your employer for the necessary form (Form P38(s)) and too many employers are unaware of this concession.

Your employer will have to deduct National Insurance on earnings over a certain limit (£89 per week for 2002/03). The good news is that these contributions will count towards your State pension in the future.

The concession also only applies for holiday working and not for term time working when your employer will have to deduct tax from your wages.

You should check at the end of each tax year whether you have paid too much tax, as this can be claimed back form the Inland Revenue.

Working Overseas

You may need to pay UK tax if you work overseas even if you have already paid tax in the country you are working in. However you will get credit for some (if not all) foreign tax paid and, if the UK has a Double Tax Treaty with the country you may not have to pay UK tax at all.

If you are in this position you should get advice to make sure you aren’t paying too much tax unnecessarily.

Sponsorship

You may receive sponsorship from a company, Armed Forces bursaries or charitable funding. Most of these will be free of tax along with most research awards and housing benefit.

Self-employment

The rules about whether you are employed or self-employed are fairly complex. If you are thinking of working for yourself or are offered the ‘choice’ by someone giving you work then you should get advice – you can ring your local Inland Revenue office for clarification but should be aware that they wont necessarily give you impartial advice!

Student Loans

Student loans are not taxable when you receive them and you do not get any tax relief for repayments or interest. Interest is charged at a rate linked to inflation and is capped to 1% above bank base rate.

You do not need to start repaying your loan until you are earning a minimum level (unless you go on to do further studying). Repayments are collected by the Inland Revenue either by self-assessment through your annual Tax Return or by deduction from your salary.

If you are employed then the Revenue will tell your employer that they need to deduct repayments from your salary. Your employer will then be responsible for calculating the amount of repayments.

3. Avoid Tax Deducted from Bank Interest

If you are over 18 years old you can receive interest earned on your bank and building society accounts gross if your total annual income is less than the personal allowance (mentioned above). Form R85 is available from the Inland Revenue.

If you are also earning (and thus already used all of your personal allowance), transferring £3,000 of your savings each year into an ISA means interest can be earned completely tax-free.

4. Using property tax-efficiently

Given the state of the UK house market investing in a house for you to live in while studying could be an attractive proposition. You can also earn a certain amount of income tax-free from renting rooms in your home.

This is a complex area and specialist advice should be taken. There is another article you can refer to (Students - Using Property Tax-Efficiently) that outlines the possibilities available.

5. Get your parents to ‘handout’ Capital not Income

Most parents support their student children with regular gifts out of their income. In this way they will have already suffered tax on this cash (probably at 40%). A better way is for them to give you a lump sum of capital that can then be invested in the student’s name so that income earned on it is taxed at the student’s lower rates (or not at all if total income is under the personal allowance).

If the cash is invested in shares or other assets that result in a gain when sold then your capital gains annual exemption can be used. This amounts to £7,700 tax-free in 2002/03.

6. Council Tax

This one is simple – students don’t pay council tax. If you live with a non-student then they are entitled to the single person discount of 25%, as students are not counted as residents for this purpose.

7. Use of the Family Business / Company

If your parents have a family business then this can be a tax-efficient way to channel cash to you while you are studying.

This could include measures from part-time employment to gifts of shares to you and subsequent payment of dividends out of the company.

Trusts can be particularly useful to channel income to the person who is in the position to benefit from it.

You (or your parents) should take advice on how to go about this to make sure it is effective for tax purposes.

8. Last (but not least) - Pensions!

Although these are usually the last thing you think about when studying, there have been recent changes in the law that now allow parents (or other relatives) to give up to £3,600 a year into a pension for you.

Even better they only need to actually pay £2,808 as a basic rate tax credit is treated as ‘attached’ to this and paid into the pension funds.

The (only!) catch is that you can’t access this cash until your retirement but the fund could be used, for example, as security for a mortgage until then.

9. Overseas Students

Around 12% of the student population are overseas students. There are tax advantages if you are treated as coming to the UK on a temporary basis and, if there is a Double Tax Treaty in place with your country of origin you can avoid paying tax in the UK altogether. The rules are different for each country and specific advice will be needed on your particular circumstances.

Further Advice

There is further information and articles on our website www.taxationweb.co.uk. If you have specific queries and would like professional advice on any aspects of student taxation or tax efficient ways for your parents to fund you through your studies then please contact Forbes Dawson on 0161 245 1090 and ask for Kate Stephens or Naz Majeed.