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Following an enquiry from an employer, we asked HMRC to comment on a procedural matter relating to form P38(S) Student Employees.
An employer who engages a student to work solely during vacations may make use of form P38(S). If the student is able to complete the form and sign the declaration, the employer may operate an NT tax code. However, if the student subsequently starts to work for the same employer during term-time, the P38(S) form is no longer a valid authority to use an NT tax code. Instead, the student must complete a form P46 and, from the student's responses to the statements on the form, the employer must allocate the appropriate tax code and apply it to subsequent payments of wages.
The question had to do with the implications of using form P46 in this situation as the application of the first two of the three options - emergency tax code or emergency tax code on a week 1 basis, can create unsatisfactory tax problems for the student.
For example, if we take a student who has worked during the summer vacation and has signed form P38(S). This is his first job in this tax year. The employer has paid a total of £;4500 for tax months 4, 5 and 6, and has deducted NICs but no tax from the payments. When the next term begins, the student decides to continue working part-time for the same employer, so the employer gives the student a form P46 to complete. Between the start of the autumn term and the end of the tax year, a further six tax months, the student earns a further £;1440, i.e. £;240 per month. Total taxable earnings in the tax year are £;5940.
The key issue for the student, in completing the P46, is to decide whether the new part-time work during term-time is the same job that he has been doing for the same employer during the summer vacation.
If he thinks it is, this is still his "first job since last 6 April" and he ticks statement A. The employer allocates tax code 503L and operates it on a cumulative basis. The £;4500 that he has already received untaxed now becomes taxable in full, and he immediately loses all of his £;240 earnings in tax for month 7. It is not worth him working at all.
If, however, he thinks that the part-time job is now a new job, and that the work he did during the summer vacation was "another job", he ticks statement B. The employer allocates tax code 503L on a Week 1 basis, and the student now pays tax on the £;1440 earned in the remainder of the tax year, but no tax on the £;4500 he earned earlier. At the rate of £;240 per month for the remaining six months of the year, the student pays no tax. The tax actually due on £;5940 for the year is £;90, so the student ends up owing £;90.
We asked HMRC to tell us what an employer would be expected to do in such a situation, bearing in mind that an employer may not recognise in advance the impact of applying tax code 503L cumulatively in month 7, when all of the student's earnings are taken in tax.
HMRC's guidance is that
- the student should only tick statement B if there has been a break in employment between the holiday job and the term-time job. Ticking statement B reflects that the student has worked previously in the tax year. The employer should apply the emergency code on a Week 1/Month 1 basis. The tax due on the earnings whilst the P38(S) was applied will be collectible at the year end.
- the student should not complete form P46 if there is no break between the holiday job and the term-time job. Instead, the employer should use the same procedures as when the pay exceeds the Personal Allowance, i.e. change the student's tax code to 0T on a Week 1/Month 1 basis and inform the tax office of the change.
This is a new procedure and is not mentioned in any current HMRC guidance. The procedure involving the change of tax code to 0T (in CWG2, paragraph 110) currently only applies when the student's earnings in the year to date exceed the personal allowance. This instruction, in circumstances where a student continues to work in term-time, requires the use of tax code 0T, even though the personal allowance has not been exceeded.
...back to 20 July 2006
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For Payroll and Human Resource Professionals
