Student loans: Graduating to employment

It is that time of year where businesses may be taking on graduates and the basics of how student loan payments work is worth knowing for both the employer and the employee, explains Diana Bruce of the CIPP.

If a new employee was recently in further education then there is a possibility that they will have had a loan to assist them from the Student Loans Company (SLC). There is one particular type of student loan that HMRC are responsible for collecting repayments on through the PAYE system and on behalf of the SLC. They are the loans that are advanced to students under the Income Contingent Repayment (ICR) scheme.

For PAYE purposes an ICR loan is based on an individual’s earnings not the amount borrowed. The loan repayments are only collected from the April after borrowers finish or leave their higher education course and when their income exceeds a certain level or threshold. Since April 2005 the annual threshold has been £15,000 but from 6 April 2012 this increased to £15,795 and will continue to increase annually by the Retail Prices Index (RPI). We already know that the threshold for 2013 will rise by 3.6% to £16,365. So for employees paid on a monthly basis, the 2012 threshold is £1,316 per month and for those who are weekly paid, the threshold is £303 per week. Repayments of Student Loans are collected at the rate of 9% of income over these thresholds. 

For example if someone earns £20,000 per annum, their weekly gross income before any tax and national insurance deductions will be £384.61 so they will repay 9% of the difference between the £303 threshold and this weekly amount. The figure is then rounded down to the nearest pound, so in this case the difference is £81.61, 9% being £7.34 so the student loan repayment for that week would be £7. Of course most companies have commercial payroll software that will automatically calculate these deductions but there are manual deduction tables (SL3) available from HMRC’s website. The loan amounts are not cumulative so an employer will calculate the deductions on a pay-by-pay basis. This does mean that if an employee receives a large bonus for example, then the repayment will be higher than normal.

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