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Well, not all international students in the UK have to worry about filing for tax returns if they use their foreign income for paying their course fees, to buy study materials, to pay their bills, rent, and food.
Depending on whether the native country of the international student has entered into a double taxation agreement with the United Kingdom, the student may or may not have to pay tax on the income they earn in the country while they are a student.
International students who work in the UK alongside their studies are expected to pay tax and National Insurance if they earn more than a prescribed amount each year. This is also applicable to international students in the country who work abroad during their holidays.
An international student may be eligible for a tax refund. The student needs to complete Form P85 and send it to the tax office before leaving the UK to reclaim the amount. If you fail to file for tax returns on time, you’ll end up paying a penalty.
Read: The UK Graduate Visa Route – Everything You Must Know
Tax Filing The UK For International Students: The
Important Dates To Remember
- 5th October 2019 – is the final date to register with the HMRC if you are self-employed. Submit
the CWF1 form to the HMRC if you are self-employed - 31st October 2019 – Last date for filing self-assessment tax returns (Paper) for the tax year
2018-2019. - 30th December 2019 – Last date for filing self-assessment tax returns (Online) for 2018-2019
in the situation where you owe an amount less than 3000 pounds which need to be
collected by the HMRC using your tax code. - 31st January 2020 – Last date for submission of online self-assessment tax returns for
2018-2019
The UK Tax Year
The tax year in the United Kingdom begins on the 6th of April and ends on the 5th of April the following year.
The deadline for filing for tax returns for the tax year that started on the 6th of April 2017 and ended on the 5th of April 2018 was the 31st of October 2018 for paper returns and 31st January 2019 for online returns. The dates are more or less the same every year.
An Overview Of The UK Tax System
Depending on your income, which is the money you gain or earn while living in the UK, you have to pay a certain amount in taxes to the government.
Income tax is paid on the money you earn through self-employment or working for an employer. You also pay taxes on income from certain benefits and pensions.
While individuals in the UK pay income tax, businesses pay corporation tax to the government.
In the United Kingdom, income tax is collected by the HMRC, which is Her Majesty’s Revenue and Customs.
In addition to income tax, an individual is expected to pay a portion of their earnings as National Insurance. This makes an individual eligible for benefits like pensions.
Tax Filing in the UK For International Students – Criteria For Paying Taxes
International students who pursue their education in the UK are subject to certain national insurance rules and special taxes.
Many students end up paying more than what is required, as they fail to understand the working of the tax system in the UK. There are many students who are eligible for a tax rebate based on the tax law in the UK
An international student is exempt from taxes in the following situations:
- The native country of the student has entered into a double taxation agreement with the UK
- If their earnings are spent on rent, bills, course fees, and study materials
- Categorizing their savings and gifts from their family as financial support
- Working under the sponsorship of an employer outside the UK, for whom the student has to work during their holiday breaks
International students are allowed to bring 15,000 pounds each year for maintenance. They can bring more money only if it is used to pay a fee for their course.
An international student has to pay taxes in the UK if:
- There is no double taxation agreement between their native country and the UK
- Their earnings are greater than their personal allowance
- They have income outside the UK
- They spend their earnings on things besides their course fee and maintenance.
- They’ve taken the decision to be domiciled in the United Kingdom.
Double Taxation Agreements
To make sure that people do not pay double the amount as taxes on the same earnings, the UK has entered into double taxation agreements with different nations.
This agreement clearly states which country has the right to collect taxes on the different kinds of income that the individual earns while living in the UK.
International students living in the UK will need to consider two or three sets of tax laws before filing their taxes. The laws include those of their native country, the law in the UK, and the laws based on the double taxation agreement between the two nations.
The country that has the taxing rights is determined by the double taxation agreement, and in a situation where both nations have rights, the one that has priority is decided based on this agreement.
Different kinds of income have different rules under this agreement. Certain earnings or gains are exempt from taxes, and a tax paid in one country exempts you from paying the tax due in the other nation.The
Double Taxation Agreement is also applicable in a situation involving more than two nations. For example, you could be a Canadian living in the UK as an international student and receiving income from Germany.
The Benefits Of The Double Taxation Agreement
International students who come from a country that has entered into a double taxation agreement with the UK can enjoy the following benefits:
- Even if the international student in the UK has stayed over a period of 183 years within a tax year, the student wouldn’t come under a resident status, thereby exempting him/her from paying taxes to the UK.
- The student is not required to pay taxes on earnings made in their native land, including interest on a bank account or salary.
- The foreign earnings spent on education and the cost of living in the UK will also be exempted from taxes under this agreement.
National Insurance Contributions Or The NIC
An international student working in the UK must pay NIC if they are pursuing a full-time higher education course.
The student may be eligible for a refund of all contributions made to NIC if they are from a country with a social security agreement with the United Kingdom. This does not stop you from enjoying the retirement benefits either if you choose to remain in the UK following your studies.
Repayment Of Taxes
An international student who has worked part-time in the UK during his studies pays his taxes through the Pay as You Earn (PAYE) system. Under this system, the taxes get deducted automatically.
A student who works several jobs usually pays more than what is needed as taxes through this automatic deduction.
The student needs to submit a P85 form to HMRC after completing his studies and work, and before leaving the UK, to reclaim the overpaid amount.
This makes the HMRC aware that you are leaving the UK and that you need a repayment of the taxes that were overpaid. In case you’ve overpaid taxes for a period that is above one year, you need to mention that as well.
Steps For Reclaiming The Overpaid Taxes
- Fill in form P85
- Attach parts 2 and 3 of Form P45 from the previous employer, if you have it, along with P85
- Submit all these to the HMRC (Her Majesty’s Revenue and Customs)
What If A Student Is Self-Employed?
- An international student who is self-employed needs to register as self-employed within 3 months of starting work.
- A Self-Assessment tax return form needs to be filled in and submitted to the HMRC every tax year since you wouldn’t have an employer to do it for you.
- You need to clearly state your income and expenses in the form.
- Based on the details submitted, the HMRC will decide on the amount you’ll have to pay in taxes to the government.
What If The International Student Works Only During The Holidays?
The following is applicable to an international student who works only during the holidays and who earns an income that is below the prescribed personal allowance.
- Paying taxes through the PAYE system
- The NIC has to be made if the earnings are higher than the prescribed amount.
When An International Student Leaves A Job?
- Collect the P45 form from the employer when you leave a PAYE job
- Submit it to the next employer to avoid paying a higher amount in taxes in the future
Tax Credit Relief
If you belong to one of the nations where the double taxation agreement is not applicable, you could get relief from taxes through tax credit relief.
You can reduce the amount paid as taxes to your native country from the total percentage of tax you have to pay in the UK, and pay only the remaining amount that is due.
Employment Income In The UK
Employment Income in the UK can be taxed by the UK under the double taxation agreement. In case you have to pay an amount as a tax to your native country as well on the income earned in the UK, you could request your country to stop taking taxes on your UK income or deduct the amount you’ve paid as taxes in the UK and pay the remaining percentage of tax to your native country.
Reclaiming VAT (Value Added Tax) In The UK For International Students
International students in the UK can benefit from the VAT Retail Export Scheme. You can reclaim the VAT charged on your purchases.
However, your country needs to have a double taxation agreement with the UK, and you need to convince the retailer that you are an international student who is eligible for this benefit.