TAX FOR STUDENT MONEY ADVISERS

www.litrg.org.uk

ROBIN WILLIAMSON& CLAIRE THACKABERRY

June 2013

RESULTS FROM RECENT SURVEY

 LITRG recently conducted a survey on new students’ tax knowledge and Andrew Lymer, Professor of Tax University of Birmingham analysed the survey results.

Sample size is small but results indicated a lack of tax knowledge and amongst students who thought they understood tax only a small number actually did.

WHO WE ARE

Low Incomes Tax Reform Group.

An initiative of the Chartered Institute of Taxation

• Income Tax, working and Pay As You Earn (‘PAYE’)– Employment under Real Time Information (‘RTI’)

• Tax calculations and refunds• National Insurance for employees• LITRG project to help students and their advisers with

tax • Questions and discussion

OVERVIEW OF SESSION

INCOME TAX

Taxable income from:

• employment

• pensions

• business profits

• rental income

• savings and dividends

Examples of tax-free income:

• Interest on ISAs

• Certain (but not all!) state benefits, e.g. Personal Independence Payment (replacing Disability Living Allowance)

PERSONAL ALLOWANCES 2013-14

• Basic personal allowance £9,440• Personal allowance income limit £100,000• Blind person’s allowance £2,160• Age-related allowances for those aged 65 years and

above have changed now basic personal allowance unless:

- born before 6.4.1938 £10,660

- born 6.4.1938 - 5.4.1948 £10,500• Income limit for age related allowances £26,100

LITRG SURVEY RESULTS – PERSONAL ALLOWANCE

Only 28% of students surveyed correctly knew the 2012/13 basic personal allowance.

Answers for the personal allowance ranged from £20- £21,500 per annum.

RATES AND BANDS OF INCOME TAX 2013-14

• Starting rate for savings 10% to £2,790• Basic rate 20% to £32,010• Higher rate 40% to £150,000• Additional rate 45% above £150,000

• Dividends: 10% ordinary rate• 32.5% higher rate• 37.5% additional rate

Pay As You Earn (‘PAYE’)• Mechanism for collecting tax and NICs due from wages

and salaries of employees or tax from pensions• Cumulative principle – with each pay cheque, an

appropriate amount of tax is deducted and set out on the payslip, with the intention that by the end of the year the right amount of tax should be paid

• NIC deductions on a ‘per pay period’ basis• Operated by employers and pension providers on

instructions from HMRC (Code number issued on ‘P9’)• Employees and pensioners (copy code number usually

sent by HMRC on a ‘P2’) • Week 1/Month 1 emergency codes

Real Time Information (RTI)

New way of collecting PAYE – to be used by most employers from 6.4.2013 (nearly all employers joining the system by April 2014)

Form P45 still exists

Form P46 has been replaced by New Starter information

Form P38(S) for students working during vacations only – no longer exists

LITRG SURVEY RESULTS - Pay As You Earn (‘PAYE’)

54% of working respondents always checked their payslips

• but of this only 44% claimed to know how to check their deductions

• and within that 44%, only 57% correctly knew their personal allowance.

PAYE issues for students• Why are students different to other PAYE taxpayers?

– LITRG report 2001– Unable to work full time – Multiple jobs but unlikely to earn over their tax allowances– ‘Bitty’ or ‘lumpy’ income – Negotiations about a ‘student tax code’

• Changing jobs frequently• Working in more than one job concurrently • Other temporary work, e.g. sandwich courses• Vacation-only employment• Moving – notify HMRC of change of address

PAYE for students

• Taking on a job – no Form P46 under RTI; instead ‘new starter information’ is provided to the employer

• Cumulative PAYE• Non-cumulative ‘Week 1/Month 1’ PAYE• Moving jobs – Form P45• Agency work • Multiple jobs and splitting allowances

• Form P38(S) vacation employment no longer exists

PAYE – common codes

• Personal allowance 2013/14 – £9,440 944L• Basic rate deduction (second job?) BR• K codes – hopefully unlikely for students

• Try to ensure that allowances (probably 944L code) are against largest source of earnings; BR on secondary sources

• Watch for duplication of allowances – could lead to an underpayment of tax

• Splitting of personal allowance

PAYE for students - example

Louise starts part-time evening work on 1 October 2013, earning around £400 a month. She hasn’t worked before in the tax year so informs her new employer that this is her only job and first job of the tax year. She is given cumulative code 944L. She pays no tax on her wages.

From 1 November 2013, she takes a Saturday job as well, earning another £200 a month. She provides new starter information to say it is a second job. Code BR is applied, so £40 a month tax is taken off her.

What can she do?

PAYE for students – example (2)

By 5 April 2014, she will have earned:- £2,400 (evening job) – no tax deducted (‘944L’)- £1,000 (weekend job) – £200 tax deducted (‘BR’)- £3,400 total earned with £200 tax deducted

i.e. Income below £9,440 allowance, so tax overpaid

Either- Claim a refund at the end of the year OR- Get HMRC to split her allowances across the two jobs

PAYE for students – example (3)

Note code 944L was against Louise’s evening job, the larger income source.

But what would have happened had she got the weekend job first from 1 October and the evening job from 1 November.

By 5 April 2014, she would have earned:- £1,200 (weekend job) – no tax (‘944L’)- £2,000 (evening job) – £400 tax (‘BR’)- £200 more tax suffered in the year

PAYE for students – example (4)

So Louise has earned less money (£200) - but paid twice as much tax in the year.

Contact HMRC to review the codes, at least asking them to switch 944L to the larger source. Be ready with • personal details – full name, address, date of birth and

National Insurance Number• details of each employment – PAYE reference number,

(from payslips)• estimates of earnings from each job for the current tax

year.

PAYE for students – conclusions

Think in advance about total wages and check payslips.

Is total income going to be less than personal allowances?

What codes are being applied?

Contact HMRC to get best codes applied for each job.

Review total income and tax paid at the year end.

CLAIM A REFUND if overpaid.

LITRG SURVEY RESULTS RECLAIMING OVERPAID TAX

31% of student respondents have had to claim a tax refund

Of this 31%, 71% contacted HMRC directly to claim a refund

RECLAIMING OVERPAID PAYE TAX

• In-year – Form P50, if stop work for 4 weeks or more – Telephone HMRC help line

• Year end– Claim in writing– Automatic reconciliations/tax calculations (‘P800’)– Pitfalls of ‘refund companies’

• Time limits – 4 years from the end of the tax year– e.g. 2009/10 tax year must be claimed by 5 April 2014

INTERNATIONAL STUDENTS• Working: PAYE applies, as for other students (refund if

leaving the UK?)• Income or gains arising outside the UK could create a

tax problem in the UK• For most international students of modest means this is

not a problem because of double taxation agreements• If DTA allows, can bring money to the UK for

‘maintenance or education’, e.g. normal living expenses – food, rent etc, course materials and books.

• HMRC policy generally to ignore up to £15,000pa. Could justify more, e.g. student with disabilities/particular needs

• Course fees can be on top of the £15,000.• LITRG migrant website section –international students

NATIONAL INSURANCE CONTRIBUTIONS (NICs) for employees

• Class 1 NICs payable on employed earnings• Class 1 primary contributions payable by employees,

secondary contributions by employers• Class 1A & 1B contributions payable by employers on

employer-provided benefits in kind

CLASS 1 NICs RATES AND LIMITS 2013-14

• Lower earnings limit (LEL) £109 per week• Primary/secondary threshold £149/£148 per week• Upper earnings limit (UEL) £797 per week

CLASS 1 NICs RATES AND LIMITS (2)

• Below LEL, nil contributions• Between LEL and primary threshold, nil contributions but

benefits entitlement• Between primary threshold and UEL: 12% primary rate,

13.8% secondary rate• Above UEL: 2% primary rate, 13.8% secondary rate

LITRG SURVEY RESULTS-NATIONAL INSURANCE CONTRIBUTIONS (NICs)

• Only one respondent stated the Class 1 primary threshold correctly.

• Survey results indicated confusion between the LEL and the primary threshold.

CLASS 1 NICs RATES AND LIMITS - Example

• Pay period basis of calculation, not cumulative• Calculated job by job, unless connected employments

Sue works at a pub and is paid weekly. She earns £180 in one week, so her employer takes off employee contributions of £3.72 (£180-£149, @ 12%).

The next week, she does fewer shifts and only earns £110. She doesn’t have to pay any NIC that week, but doesn’t get a refund of the £3.72 she paid the week before.

Extra guidance on student tax issues

• www.taxguidesforstudents.org.uk – LITRG project, launching in early 2014

• www.litrg.org.uk/migrant - international students• www.revenuebenefits.org.uk – for tax credits information

(though many students, particularly those on full time courses, may not be eligible)

QUESTIONS AND OPPORTUNITY FOR DISCUSSION

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TAX FOR STUDENT MONEY ADVISERS

We have endeavoured to ensure that this presentation and any accompanying lecture notes and hand-outs are accurate and reflect the

up-to-date position at the time of compilation. However, this is only a simple introduction to tax and NIC and we cannot accept responsibility for the consequences of acting, or refraining from acting, on anything

contained therein.

www.litrg.org.ukROBIN WILLIAMSON

& CLAIRE THACKABERRYemail litrg@ciot.org.uk