7 important tax facts every student needs to know

Learning the basics of tax can save you money and boost your finances. We're here to show you how with these essential tax facts.

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Waiting until you've graduated to get to grips with tax? You could be missing a trick, as well as a few quid. Knowing how tax works can help you maximise your earnings, get more from your savings, and ensure you're the master of your Student Finance.

Once you get the gist of it, you can apply these principles to the rest of your life to stay on top of your money.

While the rules can be more complicated than an EastEnders love triangle, we've broken things down so you can understand the basics of tax and become an expert in no time.

Student taxes explained

Here are seven things to know about tax in the UK:

1. When do you start paying tax?

   Everyone in the UK is liable to pay tax – but only on what you earn over the Personal Allowance. To explain what this is, we should first outline how tax works in the UK.

   Tax is calculated in bands, and you'll pay a different rate of tax on different chunks of your earnings.

   In England, Northern Ireland and Wales, the tax bands are:

   • £12,571 – £50,270 is taxed at 20% (basic rate)
   • £50,271 – £125,140 is taxed at 40% (higher rate)
   • Over £125,140 is taxed at 45% (additional rate).

   In Scotland, the tax bands are different from the rest of the UK:

   • £12,571 – £14,876 is taxed at 19% (starter rate)
   • £14,877 – £26,561 is taxed at 20% (Scottish basic rate)
   • £25,562 – £43,662 is taxed at 21% (intermediate rate)
   • £43,663 – £75,000 is taxed at 42% (higher rate)
   • £75,001 – £125,140 is taxed at 45% (advanced rate)
   • Over £125,140 is taxed at 48% (top rate).

   But from £0 – £12,570, the money you earn is tax-free. This is known as the Personal Allowance.

   If your annual salary is £20,000, this means you'll pay no tax on the first £12,570 and 20% on the remaining £7,430 if you're a taxpayer in England, Wales or Northern Ireland. In Scotland, you'll pay no tax on the first £12,570, 19% on the £2,306 after that, and 20% on the remaining £5,124.

   You're entitled to that £12,570 as tax-free income as long as your adjusted net income is less than £100,000. However, for every £2 you earn above £100,000, your Personal Allowance goes down by £1. So, if you end up on a super high salary and earn £125,140+ a year, you'd have to pay tax on that full amount.

   Bear in mind that your annual salary here is calculated across the tax year, which runs from April to April. If there is a change to the Personal Allowance, this will also come into effect at the start of the tax year.

   As we've already explained, in 2024/25 the Personal Allowance is £12,570. In other words, the first £12,570 you earn in the financial year is tax-free (as long as you earn less than £100,000).

   If you claim Blind Person's Allowance or Marriage Allowance, your Personal Allowance could be higher.

2. What income is taxed?

   

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   There are two types of income you need to know about: taxable and non-taxable.

   Taxable income includes wages, interest earned from some bank accounts and savings (usually only if it's over £1,000 a year), job perks (bonuses, expenses) and some state benefits, such as Jobseeker's Allowance.

   Taxable income counts towards your Personal Allowance. So, if you earned, say, £12,400 a year from your job (i.e. less than the Personal Allowance), extra income of this kind could nudge you over your allowance. Even money from paid online surveys counts toward it, so be careful!

   Non-taxable income includes bursaries, grants and scholarships, other state benefits such as Child Tax Credits or Disability Living Allowance, plus interest from ISA savings accounts.

   So, does Student Finance count as income? No, your Student Loans do not count as taxable income in the UK, so you don't have to pay tax on them.

   Unlike taxable income, non-taxable income doesn't count towards your Personal Allowance, so don't worry about any of these tipping you over the threshold.

   Now you know the difference, here's where you make it pay for you: only taxable income has to be declared when applying for means-tested funds, including Student Finance. Whether it's yours, your parents, or whoever else is included in your 'household income' calculations, only include taxable income.

3. You can reclaim overpaid tax and National Insurance

   While the system can be abused, especially by big-bucks corporations who really should know better, paying tax and National Insurance (NI) is a good thing. NI pays for social welfare (benefits, the State Pension and the NHS), which is why it's usually taken out of your wages before you get paid.

   Unfortunately, the system by which most employed people pay taxes (Pay As You Earn, or PAYE for short) often overtaxes students. If this happens to you, claim the tax back.

   Get into the habit of checking your payslips to see what you've earned, for how many hours of work, and with what deductions. And, if you've paid too much tax, ask for it back by getting in touch with HMRC.

   As for National Insurance, the rules surrounding who is owed a refund are a little more complicated. If you believe you've been charged incorrectly (a common cause is that complications have arisen from having two jobs), use this government tool to find out.

4. You could save tax if you're self-employed

   If you run a business that earns you an income – whether it's doing design work via Fiverr, pet sitting or even selling on Etsy – you'll likely need to pay tax on your earnings.

   And yes, being a freelancer counts as being self-employed!

   Once you've checked whether or not you're liable to pay tax, you'll need to register as self-employed with HMRC (a five-minute job) and become responsible for paying your own tax and NI.

   Don't worry if your business is making a loss – only profits count towards your Personal Allowance. Profits are calculated as your business income minus legitimate business costs (advertising or equipment, for instance). Keep notes such as receipts about both.

   And remember, any cash you channel into your business is still your money, not some magical gift from the tooth fairy. There's no point in over-investing just to save on tax if it means you're losing out on pay.

   If you earn over £1,000 from self-employment, you'll need to declare it by completing a self-assessment return (a summary of your income and costs for the year). You can still benefit from the Personal Allowance (£12,570).

5. Earn tax-free money with your savings interest

   

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   By placing money in a savings account, you could potentially earn tens – if not hundreds – of pounds in interest each year.

   There's a starting rate for savers, which means you can earn up to £5,000 of interest before paying tax. For each £1 you earn above the £12,570 Personal Allowance, the starting rate for savings will go down by £1. As such, you can earn up to £17,570 as a combination of salary and interest without paying tax.

   As well as this, anyone in the basic rate tax band gets a tax-free personal savings allowance of £1,000. This decreases to £500 for higher rate earners and £0 for anyone in the additional rate bracket (a reminder of what each band is).

   Check out our guide to the best student savings accounts to find out more and compare offers.

6. Open an ISA for even more tax-free interest

   Back in the day, ISAs (Individual Savings Accounts) were the only way to earn tax-free interest on your savings. However, since the rules were changed to allow most people to earn a fair whack of interest (up to £1,000 for many) without paying tax, some have questioned whether ISAs are worth having anymore.

   It's a reasonable thing to ask, but there are a few factors to consider. First and foremost, the tax-free interest allowance could change (or be removed) in the future. It's only been in place since 2016, so you shouldn't assume that these things are set in stone.

   Secondly, if you're lucky enough to be a high-earner, an ISA could be your best shot at earning tax-free interest. Remember that higher-rate taxpayers only get £500 of interest tax-free (it's £0 for additional-rate taxpayers), but ISAs are always tax-free. So, if you think you'll be a high-earner in the near future, opening an ISA might be a wise idea.

   You can put up to £20,000 into an ISA in the 2024/25 tax year. If you saved that much money in the account every year for 10 years, you'd have £200,000 of savings and all the added interest would be tax-free. Unrealistic, perhaps, but an example of why the ISA still has its place!

   Lifetime ISAs (LISAs) are especially good for getting extra free money. Although you can only use them to save for a house or retirement, you could earn up to £1,000 in bonus payments every tax year, up to a total of £32,000.

   However, a key thing to know about LISAs is there can be a penalty for withdrawing your money early so do plenty of research before opening an account.

   Our guides to cash ISAs and the Lifetime ISA (LISA) should tell you everything you need to know and help you decide what's best for you.

7. The tax rules can boost your Student Finance

   We touched on it earlier, but it's worth repeating: if you're applying for Student Finance, remember that only taxable income is means-tested. You could lose out on a chunk of Maintenance Loan if non-taxable income is included in your calculations, so make sure your parents are aware of this too.

   Bursaries, grants and scholarships are usually tax-free (along with Student Loan money). They shouldn't count towards your Personal Allowance or affect any other means-tested money you want to apply for, such as benefits. Always get it in writing, though, to know where you stand.

   And, crucially, the thresholds for Student Loan repayments are based on taxable income – so it's essential to know about.

Tax mistakes to avoid

Now you've learned the basics of what you should be doing with tax, here are some simple tax mistakes to avoid:

• You may need to pay tax on the money you make online. If you just sell a few books occasionally, you probably won't need to pay tax. If you find you're buying stuff to sell on, you've probably wandered into trading – see our section on self-employment to get to grips with this.
• Money earned overseas is still taxable. If you sell goods and services overseas (like selling photos online, for instance), you may also have to pay tax to other countries. Some sites will prompt you about this, but not all do. Find out about any relevant tax treaties to avoid being taxed twice (this is also worth researching as an international student working in the UK).
• Cash isn't tax-free money. It's not legal for employers to pay you without deducting tax and NI. There's a risk that people who want to pay in cash might also skimp on your rights as an employee, too – so be cautious. If you earn cash, keep notes and be prepared to declare it in a tax return.
• While you can and should claim back overpaid tax, remember that it goes both ways. If you don't pay enough tax, HMRC will (eventually) want it back. Make sure you know the rules.

You've mastered tax – now it's time to get on top of the rest of your finances by avoiding these common money mistakes.