Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HMRC. Employers have an obligation to deduct student loan repayments in certain circumstances and to account for such payments ‘in like manner as income tax payable under the Taxes Acts’ (Education (Student Loans) (Repayment) Regulations 2000, SI 2000/944, reg 14).
With effect from 2016/2017 there are two plan types for student loan repayments:
- plan 1 with a 2016/2017 threshold of £17,495 (£1,457 a month or £336 per week);
- plan 2 with a 2016/2017 threshold of £21,000 (£1,750 a month or £403 per week)
Plan 1 loans are pre-September 2012 Income Contingent Student Loans. Loans taken out post-September 2012 in England and Wales have the higher threshold of £21,000. Previously these have been repaid outside of the payroll directly to the SLC. From April 2016 they will be calculated and repaid via deduction from the payroll. So from April 2016 employers and payroll software will have to cope with both types of plans.
Broadly, employers are responsible for:
- checking if a new employee needs to make student loan repayments;
- deducting student loan repayments and passing the payment to HMRC; and
- recording student loan repayments on employee payroll records, pay slips, Full Payment Submissions (FPS) and on a form P45 when an employee leaves.
Employers are not responsible for deciding that employees have to make student loan repayments or handling employees’ student loan queries.
Student loan deductions are made from gross pay, alongside tax and NIC. Deductions are rounded down to the nearest pound. Deductions are non-cumulative and so employers can ignore the question of amounts already deducted. HMRC provide tables, and the employer CD-ROM can be used to calculate the deduction which (because of rounding) may not be exactly 1/52 of the annual amount.
If an employee has two jobs, the employer does not need to be concerned with the employee’s other income, but should calculate the deduction based only on amounts paid by him. However, if the employee has two employments with the same employer, these should be aggregated for student loan purposes if they are aggregated for NIC purposes.
Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee’s pay to the extent that earnings exceed the relevant threshold (see above).
Each pay day is looked at separately and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month the employer should not make a deduction.
James leaves university in June 2016 and starts a new job in August 2016 earning £2,000 a month (£24,000 a year).
His student loan repayments will commence in April 2017 and will be calculated as follows:
Income in April 2017: £2,000 – £1,750 (starting limit) = £250
£250 × 9% = £22.50 repaid in April 2017.