Internship Tax Guide
We’re all familiar with what an internship is, but as a quick reminder, it’s a period of work experience, usually lasting for a fixed term between a week and 12 months, and typically undertaken by students or recent graduates.
There’re different types of internships, such as paid, unpaid, or voluntary, and consequently, different things to consider when applying for one.
We put together this guide to help you clarify every possible doubt you might have about internships, especially related to taxes.
What types of internships are there?
The main difference to consider is between paid and unpaid internships, depending on your employment status within the company. Specifically:
- A worker
- An employee (rare as you’d be equal to a full-time employee)
- A volunteer
If you’re considered a worker, so you’ve got a contract or arrangement with the company to do work or service personally for a reward, the company has to pay you at least the National Minimum Wage and your status’ benefits required by law. The same happens if you’re considered an employee (same as a worker but with employment benefits).
If you’re a volunteer, for example, for a charity, voluntary organisation, associated fundraising body, or a statutory body, you aren’t entitled to receive remuneration, comprehending the National Minimum Wage. The reason is that you don’t have a contract of employment and, therefore, aren’t under any contractual obligation.
However, there’re other cases where unpaid internships are legal. Specifically:
- Student internship: if your UK-based further or higher education degree requires you to do an internship, you aren’t entitled to the National Minimum Wage.
- School work experience placements: the same append for students of compulsory school ages.
- Work shadowing: meaning following and looking at (shadowing) a company’s employee to learn about their role and acquire new knowledge. Even in this case, you won’t receive the National Minimum Wage.
Note that any other type of unpaid internship should be considered illegal.
How much can I make as an intern?
How much you can earn as an intern depends mainly on your status and the company. If your internship falls under the unpaid ones, unfortunately, you won’t earn anything. However, you’ll likely receive subsidised travel and/or meals.
On the other hand, if you’re considered either a worker or an employee, you’re entitled to receive at least the National Minimum Wage. It’ll differ based on your age. Specifically, in 2022, the National Minimum Wage (hourly rate) is the following:
- For those aged 23 & over: £9.50
Note that this rate represents the National Living Wage
- 21 to 22: £9.18
- 18 to 20: £6.83
- Under 18: £4.81
- Apprentice: £4.81
Note that this rate applies only to people under 19 years of age or age 19 or over in their first year of apprenticeship. Otherwise, they’ll be entitled to the minimum wage appropriate for their age.
These rates are modified every year on 1 April.
However, as stated above, what you’ll earn also depends on the company, as they can offer you more money than the one required by law. According to the employment website Indeed, in 2022, an intern’s estimated average based salary is around £22,500 per year.
Do I need to pay tax? How do I pay tax?
This all depends on how much money you make as an intern and your contract type.
You won’t have to deal with taxes if your internship is voluntary or unpaid.
On the other hand, if you’re under contract as a worker, employee, or self-employed contractor, you might need to pay taxes depending on how much you earn.
How does it work if I’m considered a worker or an employee?
In the UK, you start to pay income tax and National Insurance contributions only when you exceed your personal allowance (£12,570 per year). Once this happens, you’ll be taxed at the basic rate (20%) until you reach the following tax band threshold (£50,270). National Insurance contribution will consist of 13.25% of everything between £1,048 to £4,189 a month.
In short, you’ll be liable for income taxes if you earn more than £1,042 a month and for National Insurance contribution if you earn more than £242 a week.
However, if you’re considered either a worker or an employee, the company should take care of your taxes through PAYE (pay as you earn), meaning that they’ll detract them from your salary before giving it to you.
Note that companies may apply this rule from day 1, meaning that if you earned less than £12,570 when your internship ends, you’re probably entitled to a refund. If this happens, you can claim a refund from HMRC here.
How does it work if I’m considered self-employed?
If you’re self-employed, it works a bit differently. Specifically, if you’ve earned less than £1,000 a year, you do not need to do anything. HMRC lets you earn £1,000 a year through self-employment without worrying about income tax.
If you earned more than £1,000 a year from self-employment, you need to submit a tax return. This doesn't necessarily mean you need to pay tax. It just means HMRC wants to know a little bit more about your situation in case you start earning more in the future.
Specifically, as already explained, you’ll need to pay tax on your income if you make over £12,570 in the tax year.
Then, if you start to earn more, your tax band will change. Specifically, the tax bands are:
- Tax allowance: 0% of earnings (You’ve earned between £0 and £12,570)
- Basic rate: 20% of earnings (You’ve earned between £12,571 and £50,270)
- Higher rate: 40% of earnings (You’ve earned between £50,271 and £150,000)
- Additional rate: 45% of earnings over £150,000
Being self-employed, you’ll need to fill out a self-assessment tax return. What you pay is your freelance tax bill minus the expenses of running your business. You can read more about how to complete your self-assessment tax return in this Earnr article (or we can help you with that!).
The usual cut-off date to complete your self-assessment is the 31st of January if you’re doing it online, and the 31st of October if you’re completing the form by post.
What can I expense as an intern?
Even in this case, it depends on your situation, specifically if you’re employed or self-employed.
If you’re employed (as an employee or worker)
Claiming expenses when employed under PAYE is quite hard because if the employer doesn’t reimburse you directly for them, HMRC claims they weren’t necessary.
HMRC states that to be claimable expenses, “the employee is obliged to incur and pay it as holder of the employment” and “the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment”.
What does this mean? It means that:
- The expenses were necessary for any employee doing your job, not just for you.
- They must be wholly and exclusively for employment, not partly for personal use or other reasons.
- They were made while you were engaged in your job, not at any other time.
Note that expenses must also be lower than your earnings.
If you’re self-employed
As self-employed, you can deduct expenses from your taxable profit as long as they're eligible.
So if you earn £20,000 and claim £5,000 in expenses, you’d only be taxed on £15,000 for the year.
Note that if your expenses are under £1,000, you can claim the tax-free trading allowance, meaning that you don’t need to keep your receipts, but you won’t be entitled to claim any expenses.
You can read more on what the Government considers expenses here.
As a self-employed intern, you might have expenses thighs like:
- Use of your home as an office base if you WFH, meaning bills, phone usage, postage, etc
- Materials and equipment, such as if you need specific equipment to carry out your tasks.
- Accountant fees
- Travel costs
- Meals
Be aware that if you use your home as an office base, you should calculate which portion of your bills or phone usage can be counted as a claimable expense.
How can Earnr help?
Earnr makes self-employed bookkeeping easy so that you can spend less time worrying about this kind of stuff and more time growing your business.
You can separate your business transactions from your personal ones, track your expenses and get a real-time tax estimate so you know whether or not you need to submit a tax return.
Check it out here.
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