A contractor’s guide to student loan repayments

They might not be at the forefront of every contractor’s tax, accounting and financial strategy but a student loan is nonetheless something to get right when it comes to repayments, invariably for younger contractors who are often the most in need of an accountant, writes Matt Fryer, managing director of Brookson.

Student Loan Repayments: the basics

How much you repay of a student loan depends on your income and your plan type.

You will repay either 9% of your income over the threshold if you’re on plan 1, 2, 4 or 5 and 6% of your income over the threshold if you are on a Postgraduate Loan Plan.

We have summarised these plans; their repayments and the corresponding salary thresholds in the below table:

Interest is charged at varying rates between 6.25% if you are on Plan 1 and Plan 4 and 7.3% on Plan 2, 5 and the Postgraduate loan plan.

Repayment misconceptions: what income is included when calculating your student loan repayments?

Directors who pay themselves a low salary and more significant dividends to benefit from efficient tax planning in their PSC could be forgiven for thinking that as their salary is low and below the monthly “plan” threshold (see the table), they will escape student loan repayments.

This is not the case! HMRC will include unearned income (such as dividends, interest from savings and profits from letting out a property), where the amount exceeds £2,000 -- and you are obliged to complete a self -assessment return.

I’ve got both a salary and dividends from my PSC- when do I pay my student loan?

If you have already made student loan repayments under PAYE in the tax year, then you do need to record these amounts on your self- assessment return.

Under self- assessment, your student loan repayments are due January 31st following the end of the tax year. So, for the tax year ended April 5th 2023, your payment will be due on January 31st 2024.

Student loan repayments are not part of any ‘payments on account’ you make under self-assessment, nor do you need to take them into account if you are working out whether you can claim to reduce your payments on account.

Student loan repayments under self-assessment are included with your overall tax and National Insurance contributions (NIC) bill. So if you are late paying, for example, you will face the same penalty for your student loan repayment as the rest of your tax bill.

However, you can request a refund if you have paid more than the total amount you owe.

Should I make additional payments to clear my student loan sooner?

You can choose to make extra repayments towards your student loan.

These repayments are in addition to the repayments you must make when your income is over the threshold amount for your repayment plan. In theory, though, paying down a loan with a lump sum makes sense, as you could be debt-free sooner!

However, while getting rid of debt may seem a good policy, some people would actually be doing their finances a disservice, by repaying their student loan early.

This is because the government clears your loan, including any interest left unpaid, after a certain time. This time period is 25 years after the first repayment for those who started an undergraduate course before September 2012 (known as ‘plan one loans’), or 30 years for students between then and now (plan ‘two’ and ‘four’ loans).

Meanwhile, Plan 5 loans are to be written off 40 years after the April you were first due to repay.

So at the date you are looking to make an additional repayment, it may be beneficial to consider the age of the loan and your projected income to the date of the cessation of the loan, as any residual part of the loan that may be written off anyway.

Please also note that the loan is cancelled on the death of the borrower.

Do I have to make student loan repayments even if I work overseas?

Yes, even if you work overseas, that doesn’t get you out of paying back your student loan!

In particular, if you leave the UK for more than three months, you are required to update your details so the Student Loans Company (SLC), can work out if you have to repay while you’re not in the UK. The SLC will ask you for your bank details.

The rules for repayment are the same as in the UK, apart from different repayment thresholds for each country. Essentially, if you’re abroad, your repayment amounts are based on the minimum amounts under Plan 1,2,4 and the postgraduate loan plan for that country.

Conclusion

It is important to recognise that once your income (both earned and unearned combined) exceeds the yearly threshold for your plan, then HMRC will look to collect the loan repayments accordingly.

If you are looking to make additional payments to clear your loan, we suggest that you speak to your accountant or financial adviser, as settling your student debt may not be the best use of your funds and once you have made your decision, you cannot get a refund for extra repayments if you change your mind.