What is tax? Information & advice for students

As the saying goes, nothing is certain in life except death and taxes. For that reason alone, taking an interest in tax is wise. Tax impacts everything from the wages you receive in your pocket each payday, to the treatment you receive from the NHS when you’re sick.

The good news is HM Revenue & Customs (HMRC) have worked hard in recent years to make both the reporting and payment of Income Tax and National Insurance much easier and more transparent for the average taxpayer, and certainly for those of us who are in employment.

Most employed people can rely on their employer to calculate the tax due on their employment income and pay this over to HMRC directly, via a system called Pay As You Earn (PAYE). This means if you earn less than £100k per tax year (6 April to 5 April each year) and have no other sources of income, generally you can sit back and relax in the knowledge your employer is making tax payments to HMRC on your behalf, and you are not required to file a Tax Return. The repayment of any student loan will also be deducted from you automatically by your employer, once you reach the earnings threshold required for repayment (you may need to notify your employer of this).

However, whether the tax you pay via PAYE is accurate is for you to determine and this is where things can sometimes get complicated. Your employer will use a ‘tax code’ provided by HMRC to calculate your income tax, based on the income tax allowances and rate bands HMRC expect you to be subject to each year. Most individuals who earn less than £100k per tax year are entitled to a tax free earnings allowance of £12,500 for the 2020/21 year, meaning you do not have to pay income tax on these earnings unless you have waived your right to this allowance (sometimes relevant for non UK domiciled residents). Earnings above this are subject to income tax at rates of 20% to 45%, depending on your income level, with National Insurance levied on top.

If you have employment benefits (such as a company car/medical benefit etc) your tax code should reflect the value of these benefits, to ensure income tax is also paid on these during the tax year. You can find your tax code on your payslip, and you should check this regularly (particularly at the start of a new employment and tax year) to make sure it is accurate. If you are not sure a call with a HMRC advisor can be useful to talk through your personal situation.

If you earn over £100k per annum and /or have untaxed income you will likely need to file a Self-Assessment Tax Return to report this income to HMRC. The deadline for filing returns online and paying any income tax is 31 January following the end of the tax year. You should register with HMRC to obtain a unique taxpayer reference number and this will allow you to file your Tax Return to HMRC online.

Those that are self employed are able to benefit from a greater degree of flexibility in the way their income is subject to income tax (i.e option to trade as a sole trader vs a limited company), however seek advice before making any decisions here as both carry different compliance obligations and tax considerations.

To summarise, when armed with a basic knowledge of how the tax system works you will help yourself to budget accurately and give yourself the opportunity to consider how best to structure your working environment.

Written by Stephanie, a specialist consultant in Tax working for a ‘Big 4’ firm. The above is not intended to provide advice and is the personal view of the author.