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If you employ a student at any time other than their normal holiday periods (or if a student works for you both during and outside their holidays), then you should operate the normal PAYE (Pay As You Earn) procedures used for any other employee.
But if you employ a student solely during their summer, winter or Easter holidays, you may be able to pay them without having to deduct PAYE tax.
In most instances, National Insurance contributions (NICs) will still have to be deducted.
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From 6 April 2013, Form P38(S) will be withdrawn and students will be treated in the same way as all other employees for PAYE tax and NICs purposes regardless of when they work for you.
The processes described here will be different after you start to send PAYE information in real time. This might be a good time for you to familiarise yourself with any changes so that you are ready to operate PAYE in real time.
If a student on a UK-based course only works for you during their holiday periods, and as long as their earnings remain below their Personal Allowance for the tax year, you can pay them without deducting PAYE tax.
To pay a student without deducting PAYE tax, you first need to obtain a form P38(S). The student must fill in the declaration on the form as soon as they begin working for you.
You should only complete the employer's statement on the P38(S) either when the student's period of employment with you ends, or at the end of the tax year on 5 April if that date falls during the Easter holidays and the student continues working beyond it.
You will need to obtain and complete a new form P38(S) for each tax year that a student works for you.
As soon as the earnings of a P38(S) employee go above their Personal Allowance, you will need to start deducting PAYE tax from your payments to them.
If this happens, you should submit a completed form P46 showing the employee's original start date (remember that almost all employers are required to do this online). You should then deduct tax as follows:
You will also need to record these deductions on a form P11 or equivalent payroll record. If you already have a P11 for the employee you should update that. If not, you should prepare a new form P11 for them.
If no PAYE tax has to be deducted, you will still need to complete a form P11 (or equivalent) for any employee for whom you have completed a P38(S) if they earn more than the National Insurance lower earnings limit. In this situation, you must:
You can set up a form P11 for holiday-work students using the free P11 Calculator in HM Revenue & Customs' (HMRC's) Basic PAYE Tools package. This will save you time and reduce the likelihood of errors when operating PAYE. However, if the student employee's earnings exceed £8,105, you will get a warning message. HMRC's Online Services Helpdesk will be able to tell you what to do if this happens.
A set of Basic PAYE Tools are now available to download straight to your computer. In addition to the P11 Calculator, the tools include:
At the end of the tax year, you must file a P14 for any student for whom you had to keep a P11 during the year, and enter the relevant details on form P35. If you haven't had to deduct PAYE tax from a student employee and the tax code on the P11 is NI, do not make an entry in the tax code box on form P14.
Almost all employers are required to file their Employer Annual Return online. For more details, follow the link below.
If you employ a UK national student who is studying on a course abroad, and who works for you only during their holiday periods, then the same P38(S) provisions outlined above for UK-based courses apply.
NICs are deducted in the normal way, but PAYE tax does not need to be deducted as long as the employee's earnings remain below their personal allowance.
In some instances, NICs will not be payable on the earnings of foreign students who work for you during their holiday periods. The rules covering NICs deductions in these circumstances are explained in our article on employees coming to the UK from abroad.
Some foreign students will also be able to benefit from the P38(S) procedures explained above, meaning that you won't have to deduct PAYE tax from their pay. The two eligible categories of foreign students are:
You will not need to obtain a form P38(S) from HMRC for sponsored students. Instead, you will need to obtain the form direct from the student - they will have been given one by their sponsoring organisation.