Student loan repayments and Self Assessment

Introduction  

How do student loan repayments in the UK work? Let us find out.

When you have spent several years studying, you will eventually begin to work. When you are in work, at some point you may need to begin to make a repayment each month against your student loan balance, that covered your previous courses. This will begin once you start to earn over a certain amount. Likewise, if you are a director of your own company and your salary is not over the level where you need to make a repayment, instead, you will make a Self-Assessment student loan repayment via your personal tax return.

Therefore, what are the rules around repaying your student loan? There are a few things to think about here, and this includes when the repayments for your previous tuition fees will start. You should also consider how you will repay tuition fee loan or loans, if you are a business owner and have a `low’ salary. There is also the option for you to make voluntary repayments.

Two separate articles on this website which explain how your personal tax position can be affected in the UK, are the UK child benefit tax charge and the UK marriage allowance transfer.

The basics

Many contractors will have amounts owing to student loans, when they start contracting. Therefore, if you are not a normal employee but instead you work via your own company, how can you calculate and make the repayments?

Your loan repayments for your student loan start in April after your further education is complete. Making repayments is compulsory, when your income is above the threshold where repayments are due. HM Revenue & Customs (HMRC) are responsible for collecting this via the UK tax system, if you are now no longer in higher education.

Plans and how student loan repayments work

How to repay

How you repay your loan depends on whether you’re employed, or self-employed. In both cases your earnings are income taxed and you will also repay your student loans if you are earning above the level where repayments become due:

  • If you are employed the amounts will be deducted from your salary.
  • Alternatively, if you are self-employed or are a company director and complete a UK tax return, you will make repayments via your Self-Assessment.

Which repayment plan are you on? 

How and when you repay your loan will depend on when you started your course.

How much you repay depends on your income, not what you borrow. You should let your employer know which repayment plan applies to you so they take the right amount.

The repayment plans 

There are 4 plans:

  • Plan 1
  • Plan 2
  • Plan 4
  • Postgraduate Loan

You cannot choose the repayment plan you’re on. If you have more than one loan, they could be on different plans.

Plan 1

You’re on Plan 1 if you’re:

  • an English or Welsh student who started an undergraduate course anywhere in the UK before 1 September 2012
  • a Northern Irish student who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998
  • an EU student who started an undergraduate course in England or Wales on or after 1 September 1998, but before 1 September 2012
  • an EU student who started an undergraduate or postgraduate course in Northern Ireland on or after 1 September 1998

Plan 2

You’re on Plan 2 if you’re:

  • an English or Welsh student who started an undergraduate course anywhere in the UK on or after 1 September 2012
  • an EU student who started an undergraduate course in England or Wales on or after 1 September 2012

Plan 4

You’re on Plan 4 if you’re:

  • a Scottish student who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998
  • an EU student who started an undergraduate or postgraduate course in Scotland on or after 1 September 1998

Postgraduate Loan

You’re on a Postgraduate Loan repayment plan if you’re:

  • an English or Welsh student who took out a Postgraduate Master’s Loan on or after 1 August 2016
  • an English or Welsh student who took out a Postgraduate Doctoral Loan on or after 1 August 2018
  • an EU student who started a postgraduate course on or after 1 August 2016

When you start repaying

You’ll only repay your student loan when your income is over the threshold amount for your repayment plan. The threshold amounts change on 6 April every year.

The earliest you’ll start repaying is either:

the April after you leave your course

the April 4 years after the course started if your course is longer than 4 years, for example if you’re studying part-time or doing a Postgraduate Doctoral course

Your repayments automatically stop if either:

  • you stop working
  • your income goes below the threshold

If you have a Plan 1 student loan

You’ll only repay when your income is over £388 a week, £1,682 a month or £20,195 a year (before tax and other deductions).

If you have a Plan 2 student loan

You’ll only repay when your income is over £524 a week, £2,274 a month or £27,295 a year (before tax and other deductions).

If you have a Plan 4 student loan

You’ll only repay when your income is over £487 a week, £2,114 a month or £25,375 a year (before tax and other deductions).

If you’re on a Postgraduate Loan repayment plan

If you took out a Master’s Loan or a Doctoral Loan, you’ll only repay when your income is over £403 a week, £1,750 a month or £21,000 a year (before tax and other deductions).

Interest

Besides the loan itself, you will also be charged interest. The interest rate is usually the Retail Price Index (RPI) plus 3%. The interest rates differ between the different plans and these are currently:

  • You currently pay interest of 1.5% on Plan 1.
  • On Plan 2, while you’re studying, interest is 4.5%. This is made up of the Retail Price Index (RPI) plus up to 3%.
  • You currently pay interest of 1.5% on Plan 4.
  • You currently pay interest of 4.5% on Postgraduate Loans. The interest is usually the Retail Price Index (RPI) plus 3%.

There are further complications with regards to the interest applicable, when you start working. The full guide for the HMRC repayments and interest can be found here.

You can check which plan you are on by using the government digital service and signing in to your online repayment account. Once logged in, you can download your ‘active plan type letter’.

The next step will be to ask your employer which plan they have you on.

If it is different from the plan in your letter, please show this to your employer so they can update your payroll details.

If you earn less than the thresholds, you do not make any repayments.

The plans are written off in the future if you do not fully repay them. You can check the details with regards to this in the link above.

If you are employed, your employer will deduct the amount of student loan to repay at the above rate through the PAYE system. The collections take place every week or every month, and this depends on when you receive your pay. You can see how much you have paid off from your student loan on your payslips or annual P60 form.

Voluntary repayments

You can choose to make voluntary repayments against your student loan balance in your online repayment account either by card, bank transfer or cheque.

When the loan gets written off

This depends on which plan you are on, however generally if you are a student from England or Wales, your Postgraduate Loan will be written off 30 years after the April you were first due to repay. Please see this HMRC page for further details.

There are also plans in place from September 2023, to extend the 30-year period to 40 years.

When you contract through your own company

Let us assume you are contracting through your own company and are taking a higher salary, above the relevant repayment threshold. Besides deducting tax and National Insurance, your company will need to deduct the amount to pay for your student loan and pay these over via the PAYE system over the course of the tax year.

If you are contracting through your own company, you may typically be taking a low salary around the NI threshold. As part of your drawings from your company, you will be taking the rest of your income as dividends. Therefore, your salary would be beneath the threshold where student loan repayments are due. However, if your overall total income is above the relevant threshold, you need to make the student loan repayment via your Self-Assessment Tax Return.

Self-Assessment Tax Return -Self-Assessment student loan

The Self-Assessment Tax Return asks you to complete and confirm your student loan status.

If your total relevant income (gross income less any reliefs) is above the annual threshold, you will make Self-Assessment student loan repayments at 9%, on any income above the threshold, through your Self-Assessment tax bill.

Once you have made your SA tax payment, HMRC will inform the Student Loan Company (SLC) about how much you have paid. They will then credit your account with this amount and your student loan balance will be updated accordingly.

The SA Tax Return also asks you to confirm if you think you may repay your student loan within the next two years. The reason for this, is to help you avoid overpaying your student loan. It may be the case, that this applies, if you are getting close to settling this. HMRC will verify the position with SLC, who will confirm if the figures calculated, exceed your loan balance or not.

If you might overpay your student loan balance, we recommend that you file your SA Tax Return early. Doing this will allow the verification process to take place. If you file after 1 November, HMRC is unable to guarantee that this will happen before the tax return filing deadline of 31 January. As a result, you may then have the task of chasing up the overpayment.

Sometimes, student loan details can be overlooked when completing your Self-Assessment tax return. Here we detail some common Self-Assessment Tax errors.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 24th, 2021 / Categories: Self-Assessment /

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