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How do student loan repayments in the UK work for a UK limited company contractor? Let us into repaying student loans and how the system actually works. When you have spent several years studying, you will eventually begin to work. When you are at work, at some point, you may need to start to make a repayment each month against your student loan balance (UK) that covers your previous courses. Please note that this will begin once you 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 UK student loan (self-employed or if you run your own contractor limited company)? There are a few things to think about here, including when the repayments for your previous tuition fees will start. You should also consider how you will repay tuition fee loans if you are a business owner and have a `low’ salary. There is also the option for you to make voluntary repayments against your previous student finance.
Two articles on this website that 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.
Student loan repayments -the basics
Many UK contractors will have amounts owing on their student loan balance (UK) when they start contracting. Therefore, if you are not a regular employee let’s look at how to pay student loan if self employed or if running your own company. When and how will the repayments come about and how can you calculate and make the repayments?
Your loan repayments for your student loan start in April after the further education in your final academic year is complete. Therefore, if you started working in the 21/22 tax year (this runs from 6 April 2021 to 5 April 2022) your payments would start in April 2022. 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 student loan balance (UK) 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 employed, the amounts will be deducted from your salary.
- Alternatively, if you are self-employed or are a UK contractor / company director and complete a UK tax return, you will make Self Assessment student loan repayments via your SA tax return.
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 student loan plan type -repayment plans
There are four student loan plans:
- Plan 1.
- Plan 2.
- Plan 4.
- Postgraduate Loan.
You cannot choose the repayment plan you’re on. They could be on different plans if you have more than one loan.
You are on a type 1 student loan 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.
You’re on a Plan 2 loan 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.
- Someone who took out an Advanced Learner Loan on or after 1 August 2013.
- Someone who took out a Higher Education Short Course Loan on or after 1 September 2022.
You’re on a Plan 4 loan 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.
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 four 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 student loan 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’d only repay when your income is over £403 a week, £1,750 a month or £21,000 a year (before tax and other deductions).
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 comprises 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%.
When you start working, there are further complications regarding the interest applicable. The complete 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 differs from the plan in your letter, please show it to your employer so they can update your payroll details.
You do not make any repayments if you earn less than the thresholds.
The plans are written off in the future if you do not fully repay them. You can check the details about this in the link above.
If employed, your employer will deduct the amount of your student loan to repay at the above rate through the PAYE system. The collections take place every week or every month, depending 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.
Student loan repayments -voluntary repayments
When you are paying back student loans, you can also choose to make voluntary repayments against your student loan balance (UK) in your online repayment account either by card, bank transfer or cheque.
When does student loan get written off
This depends on your plan; however, 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 from September 2023 to extend the 30 to 40 years.
Student loan repayments 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 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 -student loan Self Assessment
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 via your tax return. The repayment amount is 9% on any income above the threshold, through your Self Assessment tax bill.
The above applies to individuals whose income in the main taxed such as dividends for company directors or profits for self-employed people. Therefore, limited company contractors will repay their student loans via their SA tax return. Likewise, you will make self-employed student loan repayments via your tax return if you are self-employed.
Therefore, when contractors make a tax payment to HMRC, this will include Self Assessment student loan repayment. Once HMRC receive this they 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 finance balance will be updated accordingly.
The SA Tax Return 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 making a Self Assessment student loan overpayment. 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 (UK), 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 cannot guarantee 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
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