TAX FAQs

1. What is tax, how does it work and what is it for?
2. What is National Insurance?
3. How much tax do I have to pay?
4. How do I check how much tax I am paying?
5. How much National Insurance should I pay?
6. I am starting work. Do I have to pay tax?
7. How much can I earn without having to pay National Insurance (NIC)?
8. Is there a minimum wage I should be paid? What is it? Does it change depending on my age?
9. All these tax forms – do I need to keep them? How long for?
10. I am a student but plan to work in the holidays. Do I have to pay tax on my holiday job?
11. I am a student but also working and have heard that I can fill in a form so I don’t have to pay tax. Is this right?
12. And finally… where can I find out more information on the web?

[NYA is extremely grateful to the LITRG for their assistance in compiling this information.]

Disclaimer: The following information is only a short introduction to tax, National Insurance and related areas. You should always obtain specific advice before taking any action.

1. What is tax, how does it work and what is it for?

Everyone pays tax. Even young people spending pocket money pay ‘Value-Added Tax’ (more often called VAT) on lots of things that they buy. There are many types of tax – some are obvious (like tax taken off your wages) and some are hidden (like VAT which is part of the price you pay for things in the shops).

The government has several ways of collecting tax, depending on what kind of tax it is. HM Revenue and Customs (HMRC) collect most tax, but so do other organisations like your local council.

The tax system is big, which means it can be confusing. But try not to be put off finding out about tax – you could save yourself some money by making sure you don’t pay too much!

One common tax you will meet is ‘Income Tax’. This is the tax you pay on things like wages or interest you receive on a bank account. It is collected by HMRC. Some income is tax-free. The most common types of tax-free income are in this list >>

You are likely to have to pay tax on everything else (called ‘taxable income’). Find out about different kinds of taxable income >>

When is a year not a year? When it’s a ‘tax year’! The UK tax system is odd as it works on a year that begins on 6 April in one year and finishes on 5 April the next.

There are other taxes, like Council Tax and road tax which you will need to know about if you move into your own house or start driving. The Government's own Direct.gov website provides lots of information on all sorts of things, including more details of these and other taxes.

And finally, why do we have to pay tax? Well, the idea is that taxes pay for what are called ‘public services’. These services include important things like schools, roads and hospitals.

2. What is National Insurance?

National Insurance helps to pay for some state benefits (these benefits can help you if for example you are ill, stop work or when you retire). It is also collected by HMRC.

Young people start to pay National Insurance Contributions (NIC) from age 16.

A National Insurance number (‘NINO’) is unique to you throughout your life but it is not a form of identity. It is made up of 2 letters, 6 numbers and a final letter for example ZY 98 76 54 A. You should receive a NINO some time before your 16th birthday, but if you do not or have lost it, check out what to do >>

Everyone who wants to work in the UK must have a National Insurance number. You can start work without one but you must then apply immediately. Find out more >>

3. How much tax do I have to pay?

How much tax you have to pay depends basically on how much money you make – this can be from wages, a business or something else. Find out more about what tax is, how it works and what is it for >>

Most people can claim personal allowances which reduce the amount of income you have to pay tax on. This means that each year you can earn a certain amount and not owe any tax. But watch out, because you could have to pay tax as you go through the year and then ask HMRC to pay it back later. Question 4 gives some more information about personal allowances >>

If you have an account at a bank or building society or other savings, tax is likely to be taken off the interest before you get it. But if you do not have to pay tax, you can ask the bank or building society not to take the tax off by filling in a form. Find out more about this on the HMRC website >>

If you or your family are from overseas, your taxes could be different. Find out more >>

Some people also get ‘tax credits’. Tax credits are separate from the income tax system and you need to apply for them. There are two tax credits – ‘working tax credit’ for people in low-paid work or who pay for childcare, and ‘child tax credit’ for people with children – but there are age limits and other restrictions on when you can receive them. To find out more about claiming tax credits, visit the LITRG website >>

4. How do I check how much tax I am paying?

Most people living in the UK get ‘personal allowances’ for tax. That means that you can have a certain amount of income on which you do not have to pay tax. Young people who work a few hours a week usually do not have to pay tax, unless their wages are over the personal allowance, so you should not have tax taken off your wages for stacking shelves in the supermarket on a Saturday morning!

There are different types of allowances and the amounts change each year. For more information on the allowances available each year, visit the HMRC website >>

Some people with serious eyesight problems can claim an extra ‘blind persons allowance’. You do not have to be completely blind to qualify – more information on the rules can be found on the LITRG website >>

Most people when they start work are ‘employed’. This usually means they work for a person or a company either part-time or full-time on a regular basis. If you are employed, your employer (the person or company you work for) takes tax off your wages under ‘Pay As You Earn (PAYE)’. This system is explained on the LITRG website >>

If you are ‘self-employed’ or get other income on top of your wages, you might need to fill in a tax return, called a ‘Self Assessment’. This system is also explained on the LITRG website >>

If you are working and are not sure whether you are employed or self-employed, read the information on the LITRG website >>

5. How much National Insurance should I pay?

How much National Insurance (‘NIC’) you pay depends on whether you are ‘employed’ (working for one or more ‘employers’) or ‘self-employed’ (sometimes known as running your own business, working freelance or working for yourself).

If you are employed, your employer will take NIC from your wages before paying them to you - this is Class 1 NIC. Your employer may also need to pay Class 1A and 1B NIC on your behalf.

If you are self-employed you pay two types of NIC:

• one is paid for each week you are self-employed - Class 2 NIC; and
• the other is based on how much profit you make Class 4 NIC.

If you are not working and paying the other types of NIC, you do not have to pay any NIC, but you can make voluntary payments - see: Class 3 NIC. This might seem strange, but some people pay these to protect rights to some state benefits.

6. I am starting work. Do I have to pay tax?

Question 4 tells you how to find out about your ‘personal allowances’ for tax. Because of these allowances, many young people doing a part time job will not have to pay tax. Working out your ‘taxable income’ (that is, your wages plus anything else - Question 1 gives you more information) and how much your allowances are is the first step – if your income is more than your allowances, you should be paying tax.

More information on how you pay tax is given under Question 3 and Question 4.

Read the information under Question 10 if you are a student starting holiday work.

You will need to watch out if you are self-employed – you need to register with HMRC from the start. Some more information is given on the LITRG website >>

7. How much can I earn without having to pay National Insurance (NIC)?

We explained in Question 4 that there are ‘personal allowances’ which mean that most people are allowed to receive a certain amount of income before starting to pay tax. NIC is not the same as income tax as you only pay it according to your ‘earnings’ (like wages from a job), whereas tax is paid on most types of income not just earnings.

For NIC, there are also thresholds which mean you don’t pay NIC on all that you earn.

But some types of NIC are paid according to how much you earn in a week or a month, depending on how often you are paid. This is different to tax which is calculated for a whole year (even though you may need to pay some as you go through the year, for example under PAYE – see Question 4).

Have a look at the LITRG website for details on how NIC is calculated.

8. Is there a minimum wage I should be paid? What is it? Does it change depending on my age?

The National Minimum Wage applies to nearly all workers and sets hourly rates below which pay must not be allowed to fall.

Most workers in the UK aged 16 or over have to be paid a minimum amount per hour, regardless of the kind of work they do or whom they work for. The rate is reviewed every year, and any increases take place in October.

Agricultural workers have separate pay rates set by the Agricultural Wages Board.

You can find more information, including current and previous minimum wage rates, on at Directgov >>

If you think you are not being paid the minimum wage you are entitled to, there is a National Minimum Wage Helpline – call 0845 6000 678 (Minicom 0845 915 3296).

9. All these tax forms – do I need to keep them? How long for?

Generally, it is a good idea to keep all ‘official’ paperwork for a while and if you do throw things away to be careful – it is best to shred documents to protect your identity.

Tax has special rules about how long you need to keep papers. You should keep all paperwork to do with your tax (for example payslips and forms from your employer) for about 2 years after the end of the tax year; so for the year to 5 April 2009, it is best to keep papers until two years later – 2011.

If you are ‘self-employed’ (running your own business), you will need to keep papers for longer – up to 6 years. More information can be found on the HMRC website >>

10. I am a student but plan to work in the holidays. Do I have to pay tax on my holiday job?

The simple answer to this question is maybe!

First of all, it depends on how much you will earn. It also depends on whether you have already had another job in the same tax year or intend to have another job later in the tax year. (Question 1 tells you what a ‘tax year’ is.)

If you plan to work only in the holidays and over the whole tax year you will earn no more than your ‘personal allowance’ (see Question 3 and Question 4), you can ask your employer to give you a form to fill in – a form P38(S) – which will allow you to be paid without tax being taken off. This is a short form that you fill in, sign and give back to your employer. But if you earn over the weekly or monthly limit, your employer will still take National Insurance Contributions off your wages.

But some employers choose not to use the P38(S) system and instead use the normal ‘Pay as You Earn’ (PAYE) scheme. In that case, you may need to claim back some tax at the end of the year.  Find out more >>

If you have a form P45 (because you have already worked or claimed Job Seekers Allowance during the year) give it to your new employer. The form P45 shows your Pay As You Earn tax code, your total earnings and how much tax you have paid since the start of the tax year.

11. I am a student but also working. I have heard that I can fill in a form so I don’t have to pay tax. Is this right?

Sorry, students are treated the same as anyone else for tax purposes in that if their income is over their ‘personal allowances’ (see Question 3 and Question 4) they start to pay tax. Question 10 gives you information on the P38(S) form which might mean wages you earn at a holiday job can be paid without tax taken off.

12. And finally… where can I find out more information on the web?

The Low Incomes Tax Reform Group (LITRG)

LITRG provides information on its website for low-income workers and young people. It also gives an introduction to tax issues for disabled people.

Direct.gov

The Direct.gov website gives you information on lots of things to do with government. It includes a money section, which can help with tax, tax credits and benefits questions.

HM Revenue and Customs (HMRC)

The main HMRC website contains lots of information about tax and tax credits. It can be a bit confusing, but some more simple guidance can be found on the student website.