Some crumbs of comfort for students, but tax is still a problem

Published on 20 December 2006

On 6 December 2006 the Chancellor announced a package of measures to encourage students to volunteer, and to continue in education or training, but nothing to ease the primary tax issue for most full-time students, which is how they can stop too much tax being taken from them.

Students who volunteer may now qualify for a reduction in their tuition fees. The latest Student Income & Expenditure Survey shows that more than half of all full-time students had a paid job at some time during the academic year and most worked during the summer vacation. So now they will have to find time to volunteer as well as work, if they want to reduce their fees.

But sadly, as far as tax is concerned, little has changed for full-time students since January 2001 when LITRG first published Students: The case for making life easier. The problem then, as now, was that students who work have too much tax taken off their wages, which exacerbates their financial difficulties.

Just as then, students face financial hardship and for exactly the same reasons. They have to rely on income contingent loans to fund their living costs, and have to make a means-tested contribution towards their tuition fees. This drives them into work to make ends meet.

The only HMRC form specifically for students – form P38(S) – allows employers to pay students without the deduction of tax. Naturally there’s a catch, in fact there are two catches.

Form P38(S) isn’t a blank cheque for students. To benefit from it, a student’s wages cannot exceed the annual personal allowance of tax free pay (£5,035 in 2006/07), so a quick calculation of likely income is a must. But the real sting in the tail is that form P38(S) only applies if all the work is during vacations. One day working during term-time scuppers the P38(S) and puts it beyond the reach of most students. This applies even when they earn less than their personal allowance but pay some tax, which then has to be claimed back or waved goodbye.

A proportion of students continue to drop out purely because of their financial position caused by the stress of being unable to balance the need to work with the need to study.

Students change jobs relatively frequently, particularly those who study away from home, working in one location during term-time and in their home town during holidays. Often they turn up for a new job without a P45 showing details of their previous tax and income because the paperwork just doesn’t keep up with them.

Without a form P45 they have to sign a form P46 so that their employer can apply an ‘emergency’ tax code until the Tax Office confirms the correct one. Although the new style P46 gets more of them on the right code sooner than in the past, a significant number of them still manage to overpay tax. They’re not good at claiming it back either; many do not understand that they can and those that do know can be deterred by the bureaucratic hassle that awaits them.

The new P46 has an additional bear-trap for the unwary student - the innocuous looking box ‘D Student Loans’. Most students have a loan, and if they don’t stop to read the small print but blindly tick, they might have a nasty shock when they get their first pay packet. A tick in box D tells the employer to start making student loan repayment deductions, if the student earns the income threshold or more (£288 weekly or £1,250 monthly). Of course box D is really targeted at former students with outstanding loans and no one else, but carelessness can be not only costly but also a total bore to put right.

On the bright side LITRG has been working hard to persuade HMRC that a change in process would be good for students, for HMRC and for employers. We hope that 2007 will see some movement in this long-running and unsatisfactory situation.

(20-12-2006)

Contact Name: Gerry Petherick (0844 579 6700 Fax 0844 579 6701)