Income Tax as a student

All information correct from February 2023.

The largest source of revenue for the UK government is income tax. (Fun fact; income tax was first introduced during the Napoleonic Wars.) Employers have to deduct income tax and national insurance contributions from your paycheck through a PAYE (pay as you earn) system. There may be other deductions, such as student loans, too. If you’re self-employed, you will have a different kind of tax payment system.

The rate of income tax varies from person to person, depending on how much you have earned during the tax year (6 April to 5 April) and if you’re over the personal allowance.

Each person has a personal allowance of £12,500, which is the current rate. You do not have to pay tax on this; however, if you earn more than £12,500 a year, you will have to pay tax.

What Is Tax?

Taxes, taxes taxes. We all have to pay taxes - despite what you think. Tax is a levy that all people who are working in the UK must pay to help contribute towards your way of life. All your taxes go towards these things;

  • Welfare - this helps people less fortunate and/or who can’t work.

  • Health - this goes mostly towards the NHS and other health areas.

  • State Pensions - this helps people after retirement.

  • Education - this pays for all state schools in the UK and teachers salaries.

  • National Debt Interest - yes, even the government has debts to pay.

  • Defence - we need to be protected from enemies and *ahem* aliens - if all the blockbuster films are to go by.

  • Public Order and Safety - this is the police and other law enforcement organisations.

  • Transport - you need to commute to your job, right?

  • Business and Industry - this is to help new businesses and any economic affairs.

  • Government Administration - this pays for the Prime Minister and any MP salaries.

  • Environment - climate change is real.

  • Culture - this pays for galleries, museums and public parks.

  • Housing and Utilities - for building new homes and infrastructures like sewage and plumbing.

  • Overseas Aid - emergency aid for other countries and charities.

  • Contributions to the EU - this may stop after Brexit - who knows.

You can see how much money and what percentage of tax is spent on in finer detail here.

What Are The Different Types Of Taxes?

There are quite a lot of different types of taxes in the UK; we will do a simple break down for you.

  • Capital Gains Tax

  • Corporation Tax

  • VAT

  • Car Tax

  • Excise Duties

  • Stamp Tax

  • Inheritance Tax

  • Council Tax

  • Income Tax

  • All these taxes have different rates and rules that apply to them. Below we will talk about income tax and the current tax brackets.

    What Are The Current Tax Brackets?

    Here are the current tax brackets for 2020/2021. This is the percentage of tax you will pay for your annual income.

    Tax Band/Brackets Taxable Income Tax Rate
    Personal Allowance Up to £12,570 0%
    Basic Rate £12,571 - £50,270 20%
    Higher Rate £50,271 - £150,000 40%
    Additional Rate Over £150,000 45%

    This means the minimum income you earn in a year to start paying tax is £12,500. These rates only apply in England, Wales and Northern Ireland. Scotland has its own rates.

    Example; Let's say your income is £50,000. £12,500 of this is tax-free, that means £37,500 is taxable. This sum falls into the basic rate of 20%. So, you will pay 20% of £37,500 in tax, which amounts to £7,500.

    What Are Tax Codes?

    Tax codes are used by HMRC to categorise your taxable income to make sure they are taxing you correctly. Everyone's tax code is different, as everyone has a separate income, various benefits, different debts and different pensions. You may find these tax codes on your payslip. Each tax code starts typically with a number and ends with a letter. The current tax code for most people who have one job or pension is 1250L.

    Below, we will break down all the codes and what they mean.

    Letters What they mean
    L You’re entitled to the tax-free personal allowance
    M Marriage Allowance
    N Marriage Allowance
    T Your code contains calculations to work out your personal allowance
    0T Your personal allowance has been used up
    BR You’re taxed at the Basic Rate
    D0 You’re taxed at the Higher Rate
    D1 You’re taxed at the Additional Rate
    NT You’re not paying any tax
    W1 Emergency Tax
    M1 Emergency Tax
    K You owe tax from a previous year

    The above table is for England. Scotland and Wales have different Tax Codes.

    If we have piqued your interest, why not check out our explanation of job contracts and have a gander at any jobs you may find of interest.

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