First students do pay tax like the rest of us! If, however, a student's total earnings for the year ended 5 April will not  be more than the basic personal allowance (£5,225 - 2006/07) special procedures may be applied to PAYE which in simple terms means that tax will not be deducted from their holiday earnings. the full conditions which must be fulfilled are on the HMRC website .

Second, this concession only applies to holiday (vacation) earnings. If the student works during term-time the normal PAYE rules must be applied.

Thirdly, a form P38(S) must be completed. 

But don't forget that the concession doesn't apply to National Insurance. If a student earns more than the Lower Earnings Limit  (£100 per week - 2006/07) they will have to pay National Insurance Contributions.