What if I am a student?

This post is prompted by a comment from Concerned:

What if I am a full-time student, do I still have to pay tax?

Students are liable to tax on their income in exactly the same way as anybody else, although in practice few full-time students pay tax because their income is usually less than the personal tax allowance – the amount of income anyone resident in the UK can receive before they pay tax – which at the moment is £12,570.

As an aside, there is a special tax form, P38(S), for students with vacation jobs, which is designed to ensure their employers do not deduct tax from their pay. This is not because there is a special tax regime for students, it is simply an administrative arrangement to avoid students getting tax deducted from their wages and then having to claim it back at the end of the tax year after it is clear their total income is less than the Personal Allowance. There is no equivalent arrangement for part-time self-employment, and there does not need to be, because tax on self-employment is worked out after the tax year has ended so it can take into account total income and personal allowances.

Most of the money a full-time student receives is exempt from income tax and can be ignored. This includes student loans, grants, bursaries from your university, contributions from parents, gifts from doting aunts, sales of last year’s text books, poker winnings …  For the typical student the only income which is taxable – if it amounts in total to more than the Personal Allowance – is from part-time employment (Waterstones, Weatherspoons etc), part-time self-employment (escorting, Tupperware party organiser), or one-off cash-in-hand jobs (here’s £30, put on that turquoise armadillo costume and wander round the streets of Nottingham handing out these leaflets).

So if you are a student doing some part-time escorting work you are a self-employed part-time business owner just like any other part-time escort. Whether you are liable for income tax or national insurance will depend on how much you earn each tax year. The first step is to work out your self-employed profit, which is the total you receive from punters from which you can deduct allowable business expenses. You then need to add on any income from employment and any other income you receive. If that all amounts to less than the Personal Allowance (£8,105 in the year to 5 April 2013, £7,475 last year) there is no tax payable and no need to register. However you will still need to register if your self-employed profit alone is more than £5,595 (£5,395 last year). That is because the NI thresholds work differently.

In all likelihood you won’t know when you start how much you are going to earn. You might want to put off the question of registering until you have had two or three bookings and have a better idea of how much work you want to do and how much you could earn.

If you decide to register but you think your profit will be below £6,515 (the Class 2 NI exception limit) you can apply on the registration form not to pay Class 2 NI, which is normally £2.65 per week. If it later transpires that you do earn more than that you will have to pay up. Bear in mind that if you start escorting late in the tax year your profit in the first tax year will be low. So if you start in November you may earn less than the £5,595 before end of the tax year on 5 April. The following year with a full 12 months you might earn more than the limit.

Once registered you will need to complete a Self-Assessment Tax Return in the usual way. They are sent out in early April and you have until 31 October to fill it in and report your income to HMRC. You get an extra 3 months, to 31 January, if you opt to do your Tax Return on-line.

One other thing to bear in mind is that your tax position may be significantly different the year your course finishes. Let’s suppose you graduate in June and stop escorting, but you then start a full-time job in July. Anything you earn from escorting in the period from April to June will be aggregated with your employment income which will take you over the Personal Allowance. Don’t worry your employer won’t know anything about your other income, but you will need to complete a Tax Return and probably pay some tax.