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Basis period reform impacts student loan payments

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Additional profits that must be reported due to basis period reform mean that many taxpayers will find themselves pushed over the student loan repayment threshold unexpectedly. But clever planning could help minimise the effects.

26th Mar 2024
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Student loan repayments for self-employed taxpayers are based on the profits reported in each tax year. For the tax years 2023/24 to 2027/28 this will be your normal profit plus the portion of the transitional profits you decide to bring into that year, as explained in this article. The additional profit could cause a dramatic increase in your student loan repayments in one or all of the five years, but there may be a way round this. 

Transitional profits and the repayment threshold

If you are on a Plan 2 student loan (you started your course between 1 September 2012 and 31 July 2023) you will only make repayments if your income is over the repayment threshold, which is currently £27,295 a year, £2,274 a month or £524 a week.

For Plan 1 student loans, for courses that started before 1 September 2012, the repayment threshold is currently £22,015 a year, £1,834 a month or £423 a week.

Because of the additional profits that must be reported due to basis period reform, many taxpayers will find themselves pushed over the repayment threshold unexpectedly. Clever planning could help minimise the effects of this. 

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Replies (9)

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By FactChecker
26th Mar 2024 13:46

The oft-quoted aphorism of "Not letting the tax-tail wag the dog" kept popping-up whilst reading this.

Aside of the admittedly slightly pompous statement that "A loan is for repayment, not life" ...
... it wouldn't generally be wise for a self-employed person operating at this level of business to make major decisions predominantly on the basis of avoiding/minimising repayments to the SLC.

Thanks (6)
Replying to FactChecker:
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By rmillaree
27th Mar 2024 10:44

huh
this is a great practical article - not factoring in such items can lead to throwing money down the drain. imho this article is rightly saying one is stupid if one doesnt at least factor in the relevance of these items . Many people are clearly in a position where they will never pay the really old loans - that being the case it can be a decent no brainer to ensure income stays below threshold via whatever legitimate means are at play.

Thanks (2)
Replying to rmillaree:
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By FactChecker
27th Mar 2024 12:54

Practical indeed (I never suggested otherwise). You seem to be defending an attack that I've not made.

My concern is that when speed-read by non-professionals (who Amy says were the target readership), some paragraphs may not be properly absorbed - viz:

"It may be possible to play around with the spreading of transitional profits to enable the child to obtain a higher maintenance loan or grant, although other potential interactions such as national insurance contributions (NIC) and income tax should also be considered."
All correct, but the individual taxpayer has a tendency to focus on the promise of potential gains (and ignore/forget the non-specific 'should also be considered').

Do you disagree with my statement that "it wouldn't generally be wise for a self-employed person operating at this level of business to make major decisions predominantly on the basis of avoiding/minimising repayments to the SLC"?
[Note the word 'predominantly' ... although of course it should be 'factored in'].

Thanks (2)
Replying to FactChecker:
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By rmillaree
27th Mar 2024 14:22

"it wouldn't generally be wise for a self-employed person operating at this level of business to make major decisions predominantly on the basis of avoiding/minimising repayments to the SLC"?

everyone should make choices on the "whole package" that is clear and we will both agree on that i am sure.
I dont think the op is saying anything about "ignoring" other items that matter - just that one shouldnt overlook the student loan bit. imho student loan is often overlooked by many so nice to be slapped in the face in that regard.
Hopefully we can both agree on that and move on.

Note my original comments were based on this article being targetted at the more exeprienced user rather than soemone who doesnt have a clue that one thing may affect another - in that regard hopefully they are suitably warned

Thanks (1)
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By Paul Crowley
26th Mar 2024 14:52

The thing is that most readers are probably already aware and have been for quite a while about this issue.
Those for whom this would be unexpected really are unlikely to be avid readers of articles on tax.

Thanks (2)
Replying to Paul Crowley:
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By Amy Chin
26th Mar 2024 15:47

Thanks Paul. FWIW in my experience this site attracts a wide spectrum of readers, and articles such as this one show up in web searches so even the less-than-avid tax enthusiasts often stumble across them. I hoped it might also be a useful article for agents to share with clients who may be affected.

Thanks (3)
Replying to Paul Crowley:
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By Open all hours
27th Mar 2024 14:46

I’m always pleased for confirmation that our clients are (in this case) years ahead of the software experts.
We were well over a decade ahead when they proclaimed how important it was to communicate regularly with clients.

Thanks (1)
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By Mike Warburton
27th Mar 2024 14:05

Another great artice Amy.
I hadn't thought of the impact of basis period reform on student loan repayments.
What a complex mess our tax and related rules are in.
Mike

Thanks (3)
Morph
By kevinringer
29th Mar 2024 10:35

Basis Period Reform transitional profits do affect student loan but don't affect HICBC. They are taken into account for tapering the Personal Allowance but I understand they don't affect the rates of CGT. Farming businesses, like all other businesses, have to pay tax on transitional profits, but can't claim averaging relief. HMRC has successfully replaced the simple overlap relief with the most mind bogglingly complex Basis Period Reform, and because taxpayers now have to forecast their profits, HMRC have introduced uncertainty where none previously existed. I don't understand what HMRC are hoping to achieve with Basis Period Reform. I'll be very interested to see how HMRC themselves cope with it and whether MTD ITSA, which is due to start during the spreading period, will be able to cope. I guess this will be yet another reason for HMRC to kick the MTD can down the digital road postponing the start date till 2029. Going back to student loans, when does HMRC pass the figures to the Student Loan Company? I ask because now that HMRC have introduced uncertainty and have had to give taxpayers an extra 12 months to correct estimates, a taxpayer not be able to submit their final 2026-27 figures until 31 January 2029, whereas CYB would be 12 months earlier.

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