Schools and colleges finish for their annual summer break this week, and a lot of students will be starting their summer jobs. They may be working to save up for university next year, to fund holidays or simply because their parents told them they aren't sitting around the house for the summer!
Students often pay too much tax on their income and this summer this may be even worse. On 6 April 2013, the ‘Real-Time Information’operation of PAYE came into effect and the form previously used to allow students to receive their income without the deduction of Tax -P38(S) - has been abolished. For employers, who are getting to grips with the new system this means that the normal PAYE procedures apply to all students, regardless of circumstances.
Every student is entitled to the full personal allowance (£9,440 for 2013/14 Tax year) and many will earn less than this in the year however, they may still suffer tax deductions along the way. This will be due to the erratic pattern of their work –working in several jobs at once, frequently changing jobs, working during school holidays, temporary agency work –all of which can prove difficult for the tax system to keep up with and could lead to either an overpayment or, in some cases, an underpayment of tax.
Overpaid Tax can be reclaimed by the student by completing a form R40 ‘Claim for Repayment’and submitting it to the H M Revenue & Customs. In the case of an underpayment the student will need to complete a tax return and submit this by the 31 January following the tax year end. The underpayment will have to be paid in one lump sum payment which, given that it may not be payable until a year and half after the summer job had finished, will be something either they or their parents will need to plan for.
The Low Incomes Tax Reforms Group (LITRG) is encouraging students to take an interest in their tax affairs, from an early stage, by checking their PAYE coding notices and payslips to make sure that, as far as they are aware, they are paying the right amount of tax.
Early adjustments to PAYE codes, by contacting HMRC and providing estimated income figures, could prevent overpayments or underpayments of tax that will lead to the administrative burden of having to reclaim/repay at the end of the tax year.
Grandparents (or parents) looking to boost the income of their grandchild could consider making gifts out of income, if they have excess income. This is an effective way of making gifts without having to wait for the normal seven years before such gifts leave the estate and escape Inheritance Tax. As long as any gifts are truly from income and not from the sale of assets, which could bring Capital Gains Tax issues, then the gift is outside of the estate immediately.
It pays for students to be vigilant and know where they stand when it comes to their tax affairs and not just assume that it is correct or that it is something that only affects other people. Seeking some advice early, as always, is a must.
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