Is your PAYE policy up to date for your employees? Good. But what about the holiday workers that are landing next week? Check you have the right new starter gear with Neil Tipping’s practical guide.
Summer is here and many students, having completed their studies and exams, will be seeking work placement during the holidays. At the same time many companies will be looking to employ overseas students during the summer. This article explains the correct treatment of employees from the perspective of tax and national insurance.
UK students
H M Revenue & Customs (HMRC) allows a student to be paid without deduction of tax, where his or her earnings will not exceed the basic personal allowance, where they are in full-time education – at school, college or university. They must, however, be returning to full-time studies at the conclusion of the period of work until the end the tax year; and they must have no income from teaching or coaching and no employment except during the holidays.
To be paid tax free, the student must complete and sign the declaration on form P38(S)1 . This form requires the student to state their name, name of school or college, National Insurance number, date of birth and home address. The student must also confirm that his or her total earnings, including Jobseekers Allowance paid because of unemployment and other income from all sources, apart from scholarships and educational grants for the year ending 5 April, will not be more than £6475.
This figure is the basic personal allowance for 2009/10. If the student knows he or she is to be paid a salary higher than the £6475 threshold, he or she will be unable to sign the P38(S) form. In this case, the student must complete the form P462 and be treated as a standard employee Where the employee works for the employer in each holiday period, then only one P38(S) form is required, except where the holiday spans two tax years (in this case a form must be completed for each tax year).
Once the P38(S) has been completed by the student, the employer can allocate an NT tax code to the student. This means the student employee can be paid up to £6475 (£110 a week or £476 a month), without any deduction of tax. The employer is required to retain the form P38(S) for three years after the end of the tax year to which it relates.
Should the student’s earnings exceed £6475, the employer must deduct tax, starting with the week in which the threshold is exceeded. The tax code to be used is OT on a non-cumulative basis. This will tax the salary, with no allowances, at 20%. When the period of employment ends the student will be given a form P45 to show the salary and tax that has been deducted.
Students may also work for employers during term time, at weekends or in the evenings. In such cases the student must be treated as a standard employee and a form P46 must be completed, not form P38(S). The tax code then operated would be emergency code, 647L non-cumulative, where the salary exceeds the PAYE threshold of £110 a week or £476 a month. The completed P46 should be sent to HMRC so that the tax code can be confirmed.
Where the salary does not exceed the PAYE threshold, the P46 form is kept by the employer and no tax deductions made.
National Insurance
The P38(S) form does not apply to National Insurance contributions. National Insurance contributions are payable by both the employee and the employer if the student is over 16 years and the earnings threshold has been reached.
For the 2009/10 tax year, the earnings thresholds are £110 a week and £476 a month. The rate of National Insurance contributions will be 11% for the employee and 12.8% for the employer, using table letter ‘A’. Where the student is under the age of 16, National Insurance contributions are not payable and the employee would have table letter ‘X’.
Overseas students
Some students who are studying abroad and come to this country to work during their holidays are not eligible to follow the rules set out above. As the form P38(S) cannot be used, the student must complete form P46 in the usual way.
The completed P46 should be filed with HMRC unless the earnings are below the PAYE threshold. Tax is then deducted from the earnings based on tax code 647L, non-cumulative, where salary exceeds the PAYE threshold. If the salary paid is below the PAYE threshold then no tax deduction is due.
The exceptions to the above are students on courses abroad working for the employer during their holiday who are either EU nationals working in agriculture, or students sponsored by HMRC approved sponsors. Employers can, in both cases, use the form P38(S) procedure.
For sponsored students, the employer can accept a P38(S) that shows the name of their sponsor. In addition, the student must produce their Blue Card, passport or registration card as appropriate. A detailed list of sponsors is set out in IR booklet CWG2(2009), page 69 3.
National Insurance
For National Insurance purposes, if the student is a UK national studying abroad then National Insurance contributions are calculated in the usual way. Where the student is over 16 years of age and has earnings above the threshold (£110 a week or £476 a month), National Insurance will be payable on earnings above the threshold.
The situation is different for foreign students. Where the student is from an EEA country or a country with which the UK has a reciprocal agreement or double contributions convention ? and they hold a certificate, issued by their home country, to say they are paying contributions in that country ? then UK contributions are not due.
Where the student comes from a country outside the EEA with which the UK does not have a reciprocal agreement or double contributions convention, and the employer has a place of business in the UK, both employee and employer National Insurance contributions must be paid.
There is an exception to this rule. National Insurance contributions are not payable for the first 52 weeks after an employee arrives in the UK, where the employee is a student studying full time outside the UK, he or she does not normally live in the UK, the job is done during holidays and the job is similar to or related to his or her studies.
Employment rights
Students, although working only in their holidays, will be entitled to certain rights under employment law. These rights include notice, Statutory Sick Pay (if their earnings are high enough to qualify) and holiday entitlement from the first day of employment. Where the student has a fixed term contract, he or she will be entitled to be treated the same as any other permanent employee.
The national minimum wage needs to be paid to students aged 16 and 17. Provided they are above compulsory school leaving age, the current rate is £3.53 an hour. A young worker aged 18 up to their 22nd birthday must be paid £4.77 an hour.
The national minimum wage increased to £5.73 for workers aged 22 and over from 1 October 2008. This is due to go up again from 1 October 2009 to £5.80, from £5.73, for workers over 22 and the development rate will increase to £4.83 from £4.77. For students aged 16 to 17 the rate will increase to £3.57 from £3.53 from 1 October 2009.
1 Downloadable from: www.hmrc.gov.uk/forms/p38s.pdf
2 www.hmrc.gov.uk/forms/p46.pdf
3 www.hmrc.gov.uk/guidance/cwg2.pdf