Payroll Advice

The reason behind the P38s form for students

Why use a P38s form for students when a P46 form does the same thing? According to HMRC, it provides the student with a tax-free allowance of up to 5225 GBP a tax year (same as the P46). However there IS a reason for the P38s form. Simon clarifies...

The P38s process allows students who undertake work during their holiday break periods from education to receive pay free of Income Tax as long as the total earnings does not exceed the annual earnings limit at anytime. In effect it gives the student worker the ability to benefit from the full annual tax free limit (currently GBP 5,225) all up front. This is not offered to any other type of employee.

It should be pointed out that the P38s process is voluntary on the part of the employer and some notable employers do not offer or operate the option of P38s for their student employees. However, good software and service providers (such as Ceridian) offer automated capabilities through the input of a special P38s indicator which applies the annual threshold up front - and if the earnings exceed the annual threshold, automatically taxes the excess earnings under the correct tax code, as instructed by HMRC, 0T week1/month1 basis (see the P38s form).

The difference with the P46 emergency tax code process (currently 522L), whether on a cumulative basis and especially on a week 1 / month 1 basis, is that the employee only receives a fraction of the annual free pay dependent on the payment point during the tax year. So if a weekly paid employee is in period 12, they will only receive 12/52 of the free pay allowance (around GBP 1,206) where as the P38s employee will receive full annual free pay allowance of GBP 5,225. A week 1 basis employee would only receive 1/52 of the annual free pay allowance.

So the P38s process offers the student employee great advantages. For example, if the employee earned GBP 5,000 during the eight week summer break period, using the P38s process the employee would be entitled to receive all that pay tax free. Whereas, if the P46 process had been applied instead, then a significant amount of the payment would be taxed, and the employee would then have the problem of claiming the money back from HMRC some 6 months later.

P38s process does not apply to National Insurance where the liabilities are identical to other employees.

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