Introduction 

How do student loan repayments in the UK work? Well, when you have spent several years studying, you will eventually begin to work. When you are in work, you need to begin to repay your student loan when you start to earn over a certain amount. 

Therefore, what are the rules around student loan repayments? There are a few things to think about here, and this includes when the repayments start. You should also consider how you will repay this if you have a `low’ salary and also how you can make voluntary payments. 

Two separate articles of mine 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.

You can also save tax via your self-assessment if you have invested into an Enterprise Investment Scheme during the tax year

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?

Student loan repayments start in April after your further education is complete. Making repayments is providing that 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 the repayments work

There are two types of repayment plans, Plan 1 and Plan 2. Click here if you are not sure which payment plan you are on.

The thresholds for the 2019/20 tax year are:

  • £18,935 for Plan 1 for loans taken out before 1 September 2012; and 
  • £25,725 for Plan 2 for loans taken out on or after 1 September 2012.

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.

Please note, HMRC collects repayments of student loans at a rate of 9% above the threshold.

If you are employed, your employer will deduct student loan repayments 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.

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. Your company needs to deduct the student loan repayments and pay these over via the PAYE system.

If you are contracting through your own company, you may typically be taking a low salary around the NI threshold. Besides, you may then 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 income is above the relevant threshold, you need to make the student loan repayments via your Self Assessment Tax Return.

Self Assessment (SA) Tax Return

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 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) of how much you have paid. They will then credit your account with this amount.

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 this applies to you, I 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, it can be overlooked to include this on your Self Assessment tax return. Here I detail common Self Assessment Tax errors.

Voluntary payments

You can also make voluntary payments to the SLC direct at any time. That is, of course, if you can afford to do so. As a result, this will help shorten the length of the loan and reduce the overall amount of interest. However, this will not change the amount of student loan repayment that you repay on your future income. The reason for this is because HMRC will still base it on 9% on income above the relevant threshold.

Link to Contractor Advice UK group on 

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

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

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