Student Loans are part of the Governments financial support package for students in higher education. This is administered by the Student Loan Company (SLC).
HMRC are responsible for collection of Student Loan repayments where the borrower is within the UK tax system and they are no longer in higher education.
There are 3 types of Student Loan:
Income Contingent – Plan 1 The majority of current lending, for fees and grants, is collected through a repayment mechanism via the UK tax system. This system of collection is known as Income Contingent Repayment.
Plan1 1 applies if you took out your loan :
in Scotland or Northern Ireland, or received EU funding, at any time in Scotland or Northern Ireland, or;
before 1 September 2012, and:
The time taken to repay is based on income received and amount borrowed, not on a fixed time period. The amount to be paid back will depend on the amount borrowed plus the interest charged. Interest is linked to the rate of inflation and is adjusted each year in line with the Retail Prices Index (RPI). Borrowers earning more than £18,330 (from April 2018, £17,775 prior to this) gross per annum will need to repay an amount equal to 9% of any excess over the £18,330 of the loan. Loans enter repayment status in the April after borrowers finish their course. A repayment is taken in any weekly or monthly period in which the gross salary exceeds the current applicable threshold (£352 per week, £1,527 per month or £18,330 equivalent). This continues until the loan is either entirely repaid or until the remaining balance is written off under the rules of the Student Loan scheme.
There is no maximum monthly repayment, so that an account holder with an arbitrarily high income may repay an entire balance in a single instalment.
Income Contingent – Plan 2
Plan 2 applies if you took out your loan on or after 1ST September 2012 and:
you lived in England or Wales;
While you’re studying, interest is inflation plus 3%.
Borrowers earning more than £25,000 gross per annum will need to repay an amount equal to 9% of any excess over the £25,000 off the loan. A repayment is taken in any weekly or monthly period in which the gross salary exceeds the current applicable threshold (£480 per week, £2,083 per month or £25,000 equivalent). This continues until the loan is either entirely repaid or until the remaining balance is written off under the rules of the Student Loan scheme.
Fixed Term Repayment
Students who started in higher education before September 1998 would have taken out a fixed-term (mortgage style) loan. These loans, which were introduced in 1990, are repaid in a fixed number of instalments - normally 60. Typically, account holders start to repay their loan in the April after they graduate or leave their course. However, repayment can be deferred on a yearly basis if the re-payer’s gross income is less than 85% of the national average earnings. For most people the Student Loan repayments are deducted from their salary.
As you are considered an ‘employee’ of your company, for these purposes only, if you have had a Student Loan, then HMRC will send to your limited company a notice to start deductions of Student Loan repayments from your personal directors’ fee/salary.
The employer is responsible for:
A Student Loan is usually repaid via the PAYE system and deductions are made directly from your pay.
There is an annual threshold currently, £18,330 (or £25,000), below which deductions are not due. When calculating if Student Loan deductions are due, a proportion of the threshold appropriate to the pay period is deducted. The percentage rate for Student Loan repayment is 9% of pay over the threshold. For example:
Pay in week £400.00 less pay threshold £352 (£18,330/52) = £48.00 x 9% = £4.32 deduction for Student Loan.
You can also make voluntary payments to the Student Loan Company (SLC). You can send additional voluntary payments to the SLC but you must quote your Student Support Number on any correspondence.
If your director’s fee is less than £18,330 per year then your PAYE income will not exceed the £18,330 threshold. As a result HMRC will therefore look at your total income for the year including your dividend income, which they will assess via your personal tax return. Should this total income exceed £18,330, (or £25,000) then a student loan repayment of 9% of income over this threshold will be calculated via your Self- Assessment Tax Return. The payment will be due by HMRC 31 January following the end of the tax year. As your dividend income is classed as investment income, you might end up paying your loan back sooner if your income from savings and investments is also over £2,000 a year.
For example: Directors’ fee of £8,424 and dividends of £20,000 gives total income £28,424 for the year ended 5 April 2019 less the threshold of £18,330 = £10,094 x 9% = £908.46 payable 31 January 2020.
It is therefore important that if you have an outstanding student loan you notify whoever is preparing your personal tax return to ensure this is correctly dealt with on your return.
IMPORTANT: if you have made voluntary payments you will not receive any credit for them against the amount calculated under Self- Assessment. If for example the calculated amount of Student Loan was £1,000 and you had made voluntarily payments of £500, you would still need to pay the calculated amount of £1,000. The calculated amount is payable in addition to any voluntary payments made.
Under Self- Assessment, student loan repayments are treated like any statutory tax in that if you pay the amount due late you will incur surcharges and interest on the amount due.
Provided you have received proof from the Student Loan Company that the loan is fully repaid then you do not need to disclose on your tax return any obligation to make Student Loan repayments.
You should be aware that there can be a delay in HMRC receiving confirmation from the Student Loan Company that your loan has been repaid. You should therefore ensure that you make a note on your tax return that you have paid it off in full.
I am living overseas, and I am not in the UK tax system – do I still need to make payments?
Even if you are not part of the UK system you must still make repayments, the obligation to make payments is still on you even if you are not in the UK.
The Student Loan Company actively seeks overseas individuals that have Student Loans, to make contact with them and make repayment arrangements.
You will be sent a form to complete detailing all of your income, this is converted in to Sterling and the appropriate repayment is calculated. The Student Loan Company will contact you again to make arrangements for the payment to be made; this is then applied against your balance.
Even if you are on an ‘NT’ tax code, for example if you are on an overseas contract, then Student Loan deductions must still be made on your earnings over the threshold amount.
Student Loans accrue interest from the date they are paid out, up until the loan is repaid in full.
Interest on Plan 1
You currently pay interest of 0.9% on Plan 1.
Interest on Plan 2
While you’re studying, interest is inflation plus 3%.
Further information is available on the following link:
