Tax implications for students with summer jobs or taking a gap year.

The release of the 'A' level results means decision time for many students. For those considering a gap year before university, or a summer job before returning to full time education, are there any tax implications which need to be considered?

An individual is entitled to earn up to their personal allowance (currently £6,475 for the 2009/10 tax year) before having to pay income tax. For students working during the summer holidays before returning to full time education in September, it may therefore be possible that their annual earnings for the tax year will not exceed this level, and no income tax may be payable overall. To avoid suffering tax deductions that later need reclaiming, it is possible to complete a declaration, in the form of a Form P38(S) which will allow an employer to pay students without the deduction of any tax, where earnings will be below the personal allowance.

Employers should be aware that the form P38(S) is only applicable for those who are working the college or school holidays. For those individuals who are anticipating working for a longer period, for example those working part time while studying at university, or those who will earn in excess of the personal allowance, for example those planning to work in the UK during a gap year, they will be treated like any other employed (part or full time) or self-employed individual and liable to income tax and National Insurance contributions.

If as a student, you had not been working for the first part of the tax year, and upon commencing work for the summer holidays you were not asked to complete a Form P38(S), you may have been put on an emergency tax code and paid tax on your earnings. This means that when you stop working at the end of the holidays, a large part of your personal allowance could be unused, resulting in an overpayment of income tax. It is possible to reclaim any overpaid income tax if you have stopped work again during the same tax year by using a form P50. This may provide a welcome  lump sum to many students.

Form P50 is available from HM Revenue and Customs' (HMRC's) website and can be accessed by clicking here

For those who continue to work throughout the remainder of the tax year, yet may still have overpaid tax, a claim for repayment can also be submitted at the end of the tax year using form R40.

Form R40 is available from HMRC's website and can be accessed by clicking here.

In most cases, students who work abroad are still treated as resident in the UK for tax purposes and will pay tax on any earnings over the level of their personal allowance. However, many may be taxed by their overseas employer, and this can lead to complications. Some individuals may be able to claim the tax back directly from the foreign authorities, while others will have their foreign tax credited against their tax liability in the UK and will have to apply for a rebate from HMRC, as detailed above.

For those 'A' level students considering the prospect of working abroad or undertaking a gap year may sound adventurous and exciting, meaning the tax implications of doing is probably not a major consideration. However, by following some simple steps, savings can be made by ensuring that either a rebate is obtained, or simply that the correct amount of tax is paid from the offset. Some points to be considered are:

• Keeping all payslips, as it can be difficult for those with temporary overseas employment to prove that tax has been paid without documentary evidence.
• If you have been working before you leave the UK, you should notify HMRC when you intend to leave the country as this may prevent complications and problems in the future. The easiest way of doing this is by the completion of a from P85.
  
  From P85 is available from HMRC's website and be accessed by clicking here.

• If you have not worked in the tax year and you do not intend to work while travelling, you will probably not have anything to do before you leave - you can check this by contacting your tax office.
• If you stay abroad for a full tax year (between 5 April and 6 April the following year), you become a non-resident and free from UK income tax if you are in full time employment abroad, from the date which you leave the UK, until your date of return. However, if you are not in full time employment and are unable to demonstrate that your departure will be permanent then HMRC is likely to treat you as remaining resident in the UK and liable to income tax on your worldwide income.
• If you have worked over the last few months and are unsure of the date you will return to the UK, it may be wise to complete a tax return for the portion of any tax year from 6 April to the date of departure - this should prevent HMRC from chasing for any unpaid tax or outstanding information.
• The period of time spent in one place is important - this will depend on the local definition of tax residence, but stay for 183 days in some countries and you may well be liable for tax in that country, in addition to any UK tax.

Ellie Gamble, senior manager at Grant Thornton says: "Those individuals who have just received their 'A' level results, both those who are already working through the holidays, and those who are considering a gap year before university should ensure that they are paying the right amount of tax so they are not out of pocket. Further education is expensive enough as it is."

Contact us if you would like further advice on any of the above