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Tax explained

Tax explainedPlanning to earn some extra cash to fund your way through uni? Make sure you know your facts about tax
 otherwise you may end up paying too much.

Maybe you got your first pay packet but didn’t take home as much cash as you were expecting. Click below to get the lowdown on the taxes you should be paying and find out if you are eligible for a tax rebate.

Do I need to pay tax?

Even if you are student, if you have a job you will be expected to pay Income Tax and National Insurance contributions if you earn over a certain amount. This also applies if you work abroad during the holidays or are a foreign student working in the UK.

Your employer should decide any Income Tax and National Insurance from your wages before you receive them. This is known as Pay As You Earn (PAYE).

If you make money working for yourself, you'll have to register as self-employed and fill out a tax return at the end of the year. If you make more than the allowance when self-employed, make sure you set aside the money to pay your tax bill.

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What is income tax?

This is a compulsory contribution to the government to fund public services such as the NHS, education and defence. What you pay depends on your annual rather than monthly income.

You only pay tax on your earnings if you earn more than your personal allowance - £10,000 per year (£192 per week) in 2014-15. If you believe your annual earnings are below this but you have paid income tax, you need to claim back overpaid taxes. Find out more on the HMRC website.

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What is National Insurance (NIC)?

Students must pay this tax on their earnings. Paying it affects the social security you can claim in the future, such as a state pension and Jobseeker's Allowance.

NIC is calculated and deducted monthly depending on your earnings. Once paid, it cannot be claimed back. You must start paying National Insurance if you earn above £153 a week.

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How do I pay tax?

When you start a job, you must give your employer your National Insurance Number. Based on information about your income and entitlement to allowances you will be issued with a tax code, telling your employer how much tax to deduct from your wages before you are paid. The amount deducted will appear on your payslip, marked PAYE (Pay as You Earn).

If you have never worked before you may be placed on an emergency tax code. This automatically taxes you at the highest rate while your employer waits for information from HMRC about your tax code status.

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How do I know how much I’ve earned?

Your employer will keep a record of your earnings. When you leave a job, you will receive a form P45, containing all this information. Keep your P45 safe and give it to your next employer as it will ensure you don’t pay too much tax in the future. You may also receive a P60. Like your P45, this form shows how much you’ve paid in tax. The difference is that it gives a summary of your earnings and tax deducted for the entire year. 

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What if I only do holiday work?

If you only do holiday work, it's likely that you won't earn more than the allowance. However, you might still end up paying tax, as the deduction from your pay is worked out month by month. This means that if you earn more than a twelfth of the allowance in a month, tax will be taken out of your pay.

But that's not the end of the story - you can claim this tax back. You can either do this at the end of the year or when you have not been working for four weeks and you know you won't be working again that tax year. Follow the instructions on Gov.uk to do this. However, you won't be able to claim back National Insurance Contributions.

Students used to be able to fill in a form to avoid paying tax for holiday work, but this option is no longer available.

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Tips to avoid paying too much tax

  • Avoid being put on an emergency tax code by making sure that you get a P45 from your employer when you leave a job so that you can give it to your next employer.
  • Stop your bank or building society deducting tax on any interest you earn on savings by completing a R85 form and giving it to the bank. You must be certain that your annual income won’t exceed the allowance for the tax year.

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Think you might have overpaid?

Tax explainedPlanning to earn some extra cash to fund your way through uni? Make sure you know your facts about tax
If you think you have paid too much Income tax, you could be due a refund.

You may have paid too much tax if:

  • you started a new job and had an emergency tax code for a while
  • your employer was using the wrong tax code
  • you were only employed for part of the year
  • you're a student who only worked at holiday times 
  • you had more than one job at the same time
  • you stopped working and didn't get any taxable earnings or benefits for the rest of the year
  • your circumstances changed - for example you changed from full to part-time working or became self-employed

Find out if you’ve overpaid using the tax checker and reclaim anything you've overpaid.

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How can I claim overpaid tax back?

Tell your employer's Tax Office why you think you've paid too much tax. They may already have everything they need to check your claim. If not, they'll tell you what documents to send. You may get a new tax code, so any refund will be included with your wages. This should happen if you continue working for the company when the new tax year starts (in April), or if you take on a new job within four weeks of leaving the previous one. The refunded money should automatically show up in your paycheque.

However, do not rely on automatic refunds, as you could be left out of pocket.

Make sure, whenever you finish a job, that you ask for a P45 from your employer. You should fill this form out, and ask for a P50 from the tax office. Once they have both of these forms they should be able to issue you with a refund.

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