Save content
Have you found this content useful? Use the button above to save it to your profile.
students throwing caps in the air
istock_rawpixel_ltd_sl

Student loan deductions – plan types and prompts

by
20th Sep 2016
Save content
Have you found this content useful? Use the button above to save it to your profile.

Employers have been responsible for making student loan deductions (SLDs) for many years but, with the introduction of ‘plan 2’ deductions in April 2016, the system is growing in complexity. HMRC has also introduced employer prompts to help employers make deductions.

This article sets out how to decide whether plan 1 or plan 2 applies, as well as what to do with the new generic notifications.

Introduction

In September 2013, the government introduced a new system of student loans to finance undergraduate studies, referred to as ‘plan 2’, to distinguish them from the existing system now known as ‘plan 1’.

From an employer’s viewpoint, the only difference between the two is the earnings threshold that the deductions begin to be made from. However, correctly identifying which threshold to use – and what to do if you get this wrong – has proved less than straightforward.

Added to this, since April HMRC has been sending generic notifications where it believes a deduction is due but has not been made. In August, it began following these up with a phone call.

Plan 1 or plan 2?

There are three methods that trigger an employer to start making SLDs: a start notice from HMRC (SL1), ‘box 5’ ticked on a new employee’s P45, or the new employee’s answers on a starter checklist (or equivalent). Each of these identifies the plan type differently (or not at all).

SL1

HMRC’s SL1s should always state which plan type applies to the deductions. For a short while, some SL1s did not include this detail. The problem, which should have been resolved by mid-August, related to SL1s issued in relation to repayments that had started before April 2016.

P45

The employee’s previous employer will have ticked box ‘5’ on the P45 form if the employee had an SL1 in force at the date of leaving that employment. If a new employee supplies a valid P45 with this box ticked, then the employer is required to make student loan deductions. However, because the P45 form has not been amended to indicate which plan type applies, the employer will have to ask the employee. An effective way to do this is to require the employee to complete the relevant questions in a starter checklist (and sign it).

Starter checklist

The student loan questions in HMRC’s starter checklist changed in April 2016 in order to identify whether plan 1 or plan 2 applies. Employers using their own forms instead should use the same wording.

This method relies on employees answering the questions accurately, but they may be unable to or may choose not to answer the questions fully. Employees who are unsure should contact the Student Loan Company (SLC). Employers are not allowed to contact the SLC on an employee’s behalf.

For all three types of notification, if is still unclear which plan type applies, then HMRC requires employers to process the deduction as plan 1, by default.

What if it is wrong?

Plan 1 has a lower earnings threshold than plan 2, so by applying plan 1, an employee is more likely to make larger deductions than if plan 2 were applied.

If it turns out that plan 2 was correct after deductions have started, then the employee will have had too much deducted. Is the excess treated as unlawful deductions from wages? Must the employer repay the deductions to the employee?

The answer is “no”, so long as the employer acted in good faith in applying plan 1. Employers should only make deductions after receiving a proper notification and should seek confirmation of the plan type from the employee if necessary, only defaulting to plan 1 as a last resort, for example, until the plan type is confirmed.

Employers must switch to plan 2 on the next available pay day after if it is confirmed to be the correct plan type. Employees concerned about overpayments should contact the SLC.

Similarly, if the employer applies plan 2 based on the employee’s starter checklist but subsequently receives an SL1 for plan 2, insufficient deductions would have been made. The employer is not responsible for any shortfall in deductions, but must ensure that plan 2 is applied from the next available pay day.

Employer prompts from HMRC

Since April 2016, HMRC has issued generic notifications to prompt employers about making SLDs for a specific employee if none have been made (reported in an FPS) when HMRC expected them to be. Prompts will be delivered to an employer’s inbox alongside other generic notifications.

The first notification is clearly titled: ‘No Student Loan Deduction Prompt 1’. According to HMRC’s Employer Bulletin from April 2016, it is “a prompt for you to check and make the correct deduction for future pay periods”. The prompt does not indicate which plan type applies, so HMRC says employers should ask the employee or refer to the SL1 (if it can be found). Then make deductions from the next available pay day.

If the employer does not have an SL1 and therefore asks the employee which plan type applies, it may be prudent to use the relevant questions in the starter checklist, signed by the employee. As usual, if it remains unclear which to apply, default to plan 1. If the employee disagrees that deductions are due, the employer is still obliged to start making them, perhaps after obtaining confirmation and possibly another SL1 from HMRC. Refer the employee to the Student Loan Company.

If the employer does not start to make deductions after the first prompt, HMRC would send a second (‘… prompt 2’) and then may contact the employer by ‘phone to discuss starting deductions.

However, there are several reasons why an employer in receipt of a valid notification to make deductions does not do so. The employee could have a CTAEO in force, which precludes all SLDs until the debt is cleared. Or the employee’s earnings could be insufficient to make any deductions.

If an employer receives a phone call from HMRC to discuss the lack of deductions, first verify that it is a genuine HMRC call before disclosing any details because there are, unfortunately, a number of telephone scams around at the moment.

Employers should also take care not to contravene an employee’s data protection rights by disclosing that a CTAEO is in force. It should be sufficient to confirm that the deduction has been setup on the payroll system, but that it has not generated any deductions.

If an employer is reluctant to make deductions based solely on the prompt or phone call, neither of which are one of the official notification routes, and if the original SL1 cannot be located, then HMRC could be asked to provide another SL1.

Early evidence from HMRC’s phone calls so far suggests that a common reason for not making deductions is simply not seeing the SL1. Employers are encouraged to check their inbox for online notices regularly and to act on any SL1s (and SL2s) without undue delay.

Top tip for calculating deductions

A crucial point to remember when processing SLDs is that the earnings to take into account are the same as NICable earnings. This means that all the rules associated with NICable earnings, such as multiple employers and mistimed payments, also apply when processing SLDs.

For example, an employee’s SLDs began in June. She receives a pay rise backdated to 1 May and her September pay includes the arrears. Her SLD in September is based on the full arrears, including the arrears for May even though it was not in force for that pay period.

Similarly, lump sum payment of statutory maternity pay, for example, will also be subject to SLDs on the whole amount, which might not be the case if the usual pay frequency were continued.

Employers should also take particular care with benefits in kind that are processed through the payroll and with other payments such as redundancy pay. If they are not subject to Class 1 NICs, then they are not included in pay for the SLD calculation.

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.