Many people have outstanding student loans when they start contracting, but how do you calculate and make repayments if you’re working for yourself, and not a ‘traditional’ employer?
Here, Martin Smith, Senior Tax Manager at Boox looks at Income Contingent Repayment (ICR) student loans, and specifically at paying these off via self-assessment as a contractor:
HMRC is responsible for collecting repayments of ICR student loans where the borrower is within the UK tax system and no longer in higher education. They will start the April after your course finishes, providing your income reaches the relevant income threshold. For the purposes of student loans, there are two types of repayment plan, known as Plan 1 and Plan 2.
Click here if you are not sure what plan you are on.
The Plan 1 threshold for the 2019/20 tax year is £18,935 and for Plan 2 it is £25,725. If you earn less than the appropriate threshold you don’t have to make any repayments. Repayments are collected at a rate of 9% of income over these limits. If you receive a salary which is in excess of the above limits, your employer will deduct loan repayments directly from your salary through the PAYE system either weekly or monthly. You can check your payslips or form P60 to see how much of your loan you have paid off during the tax year.
If you run a personal service company and you receive a salary at a level above the threshold you will be responsible for ensuring that the correct student loan deductions are made through PAYE, however in most “PSC” cases the salary will be pitched at a level below the National Insurance lower earnings limit, in which case the following requirements apply:
Working out your student loan repayments under self-assessment
When completing your self-assessment tax return start by including all relevant income, including your self-employed profits, any employment income and any unearned income, provided the unearned income is over £2000.
In your return you will be asked to confirm your student loan status:
If the total of all relevant income exceeds the annual threshold for the repayment plan you are on (we mentioned the thresholds for the 2016/17 tax year earlier), HMRC will calculate deductions due at 9% and this will be included in your self-assessment tax bill.
Payment of your final self-assessment balance is due on 31st January each year. HMRC will then inform the Student Loan Company (SLC) of how much you have paid towards your student loan and the SLC will subsequently credit your student loan account.
Avoiding over-payment
The SA100 self-assessment form asks you to indicate if you think your student loan may be fully repaid within the next 2 years (Box 3, above). This is to help you avoid over-repaying your student loan as you get close to total settlement. HMRC will carry out a verification process with the SLC, who will confirm whether or not the figures calculated will exceed your loan balance.
If this applies to you, a good tip is to get your self-assessment in early to allow this verification step to take place. If you file after 1st November, HMRC cannot guarantee that this will happen before the 31st January submission and payment deadline. Then you will have the hassle of getting back the money you have overpaid.
What to do if you think you are paying too much
The amount calculated in your self-assessment tax return can’t be reduced. However, if you think it is too much you can write to HMRC and ask them for a certain amount to be suspended from collection pending confirmation of the amount required to be paid by the SLC.
A word of warning though, if any of the suspended amount is found to be payable it will attract backdated interest and possibly a surcharge.
Voluntary payments
If you want to, you can make additional payments directly to the SLC at any time. This is a good idea if you have the means to do so as it will shorten the overall length of your loan and reduce the amount of interest charged. However, any voluntary payments are always in addition to the amounts that HMRC collect through self-assessment. A voluntary payment will not reduce the repayment amount calculated through self-assessment.
