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Student loans and unearned income | accountingweb
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Student loan shock for those with unearned income

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When submitting tax returns to report property or trading income some might be surprised to find they must make a student loan repayment too.

10th Feb 2023
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Individuals who need to submit tax returns to report property or trading income may be shocked to find they must make a student loan repayment (SLR) alongside their self-assessed tax. 

All sorts of people can have a student loan to repay to the Student Loan Company, including those who are drawing a pension, or who earn most of their income from property.

There are five types of student loans, which all have slightly different repayment conditions, so you need to know which loan or loans the taxpayer has taken out.

Loan type Taken out Written off  Income threshold 2022/23 Deduction rate 
Plan 1 Before 1/9/2012 for English and Welsh, or before 1/4/21 for Scottish and Northern Irish  At age 65 or 25 years after first due to repay, depending on date taken out  £20,195 9%
Plan 2  After 1/9/2012 30 years after it became eligible to be repaid £27,295 9%
Plan 4 (Scottish students or Scottish courses) After 1/9/1998 At age 65 or 30 years after first due to repay, depending on date taken out £25,375 9%
Plan 5 (not yet effective) After 1/8/2023 40 years after next April after date first due to repay £25,000 9% 
Post-graduate masters or PhD courses Masters after 31/7/2016 or PhD after 31/7/2018 30 years after it becomes eligible to be repaid £21,000 6%

 

The SLR is normally deducted by employers under PAYE from employment income, so many people assume that the SLR is not due on rental income, but that is not the case.

Tax return required 

There is also the odd twist that SLR will only be due from rental income if the taxpayer is given notice to file a tax return, and if the taxpayer’s “unearned income” exceeds £2,000 for the year.

Unearned income includes:

  • interest from savings (before deduction of the personal savings allowance)
  • profits from letting (after deduction of property allowance)
  • profits from trade (after deduction of trading allowance) 
  • pension income. 

The £2,000 threshold of unearned income is all or nothing, as once the total of the unearned income in the year exceeds £2,000, the whole amount is subject to SLR deducted at the appropriate rate.

Example 1

Sarah has a plan 1 student loan for which the repayment threshold is £20,195 for 2022/23. Sarah is employed on a salary of £20,000 per year, so her employer does not deduct SLR from her earnings.

Sarah also has a let property and in 2022/23 the profit after expenses is £2,400. She will have to register for self assessment and on submission of her tax return pay SLR at 9% on rental profits of £2,205 (£20,000 + £2,400 – £20,195) as the total property income profits exceed £2,000. This SLR is payable by 31 January 2024.

Example 2 

Adam is aged 60 and has a plan 2 student loan for a teaching course undertaken as a mature student. The repayment threshold for plan 2 loans is £27,295 for 2022/23. Adam’s salary is £27,000 so he is not liable to pay SLR on his earnings. Certain subject teachers, who teach in England, can reclaim their student loan repayments, but Adam isn’t one of them. 

Adam has also started to draw a pension of £4,000 per year which is taxed under PAYE, but which is not subject to the SLR at source as no class 1 NIC is due on that pension income.

However, Adam has sundry trading income of £2,500 from selling eggs from his free-range chickens. As this trading income exceeds the trading allowance of £1,000 Adam needs to register as self-employed and complete a tax return to report that trading income. 

Adam’s unearned income reported on his tax return is £5,500 (£2,500 + £4,000 – £1,000), and he will have to pay SLR at 9% on £5,205 (27,000 + 1,500 + 4,000 – 27,295) for 2022/23.

Let Property Campaign 

An interesting question was raised in Any Answers on the interaction between the need to pay SLR when the taxpayer was disclosing tax liabilities for earlier years.

HMRC has set up a number of routes to allow taxpayers to disclose and pay tax for past years on a voluntary basis. The Let Property Campaign is one such scheme designed for landlords of residential who have failed to declare income or gains from those properties. 

In the questioner’s case the taxpayer had both employment income, pension income and property income, but had not submitted tax returns, so had not paid SLR on the pension or property income.

Richard Thomas pointed out that if HMRC does not issue the taxpayer with a notice to file (NTF) a tax return (under TMA 1970 s 8) then the taxpayer is not required to pay the SLR on the property or pension income as part of the disclosure under the Let Property Campaign.

Thomas noted that deduction of SLR from earnings through PAYE does not put any liability on the taxpayer to do anything about possible SLR liability on other elements of total income, thus there can be no failure to notify penalty for the taxpayer in respect of the SLR. 

HMRC could issue NTF for the earlier tax years, or it could make discovery assessments to collect the SLR. If payment is not made under those assessments or tax returns then failure to pay penalties would apply.

The taxpayer can of course make a voluntary payment of SLR directly to the Student Loan Company.

 

Replies (13)

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By Hugo Fair
10th Feb 2023 13:03

A good collation of many of the SL facts ... but an aspect not mentioned (and not understood by many recipients) is "You'll be charged interest from the day we make the first payment to you until your loan is repaid in full or cancelled. Interest will normally be charged at RPI plus 3%."

Fortunately, in these times of high inflation, the govt has currently capped the interest rate from 1 Dec 2022 at 6.5% - but this is a time-limited cap.

So for those who can afford to do so, you may be better off *over*-paying (i.e. paying off the loan early) ... and ignoring MDTP who has been heard to 'advise' that "if you manage to keep them in the dark for a few years, 10 I believe, then they write it all off anyway"!

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Replying to Hugo Fair:
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By Hugo Fair
10th Feb 2023 13:07

Also, do you know the definition that lies behind "first due to repay" and/or "eligible to be repaid"?

Does it mean (as I was told by an ubiquitous HMRC bod) the day after the loan is first taken out?
Or (more likely) the day after student completes relevant course?
Or (as it appears to say) the day after the first deduction is taken & paid to SLC?

There could be a range of 4-5 years (or more) there.

Thanks (1)
Replying to Hugo Fair:
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By Friendly Bookkeeper
10th Feb 2023 14:33

"So for those who can afford to do so, you may be better off *over*-paying (i.e. paying off the loan early) "

This is only the case for those who expect to continue in higher paid employment for the whole 30 years.
For example , anyone planning to be a parent (especially of multiple children) so taking significant parental leave, and planning to work part time through the childrens' growing years, might just as well pay the minimum they have to, as the debt will eventually be written off anyway.

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Replying to Friendly Bookkeeper:
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By Hugo Fair
10th Feb 2023 16:15

I did carefully use the word "may" in that sentence ... the point being that I assume any reader on here will realise that 'advice' (which this wasn't) should be specific to the individual (and their stated assumptions).

But equally your "only the case for those who expect to continue in higher paid employment for the whole 30 years" should have been qualified by "may" not "is"!

As it stands your assumptions are unquantified - ie what constitutes "higher paid employment" (given that SL deductions generally kick in before UK average earnings)?
And the likelihood is that the write-off period (already increased from 25 to 30 years for Type 1) will be increased from 30 to 40 years shortly ... so that's a long wait until you're 'safe'!

In the meantime, my point was that the interest accruing to the loan balance is at a higher rate than that available to most of us on deposit savings ... so "for those who can afford to do so", as I said, then you *may* be better off in the long run.

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Replying to Hugo Fair:
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By Hugo Fair
10th Feb 2023 17:31

Missed the EDIT cut-off due to long phone-call - but was about to append the following ...

FWIW, given that SLs only arrived with the academic year 1998/99, there have not yet been any write-offs ... and govt is prone to ensuring with a dash of a legislative pen that they don't start to become an 'issue'.
So those planning on the basis of the debt being written off are likely to be in for a nasty shock as they approach SPA if they are still trying to avoid repaying SL.

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Replying to Hugo Fair:
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By Susan56
13th Feb 2023 10:00

Yes there have been write offs. I was a mature student with a plan1 loan. It was written off when I reached 65. My biggest gripe was being charged SL on pension income until I managed to get myself out of SA. It felt very unfair that I was being charged SL on my pension income while other people weren't.

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Replying to Hugo Fair:
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By NewACA
13th Feb 2023 12:18

It must have been earlier than that, perhaps that is when they increased to £3k a year, in 98/99, I recall feeling lucky I didn't need the larger £3k loans that came out shortly after I graduated. I had a student loan for each year: 95/96, 96/97 and 97/98. In all three years I took the maximum, which was £1k a year! Seems so funny now. I remember feeling so sorry for those who studied for 4 years and ended up with £15k student loan debts in the early 2000s, that seems on the lucky side too now!

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Replying to NewACA:
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By Hugo Fair
13th Feb 2023 13:13

Sorry, slight memory failure - according to Wikipedia:

"Education Act 1962
In the years following World War II, most local education authorities (LEAs) paid students' tuition fees and also provided a maintenance grant to help with living costs; this did not have to be repaid.
The Education Act 1962 made it a legal obligation for all LEAs to give full-time university students a maintenance grant.
By the early 1980s the maintenance grant depended on parental income and for many students, about 30,000, was a minimum grant.
There was no legal obligation on parents to make this up to the full grant.
The full grant had increased by 1980 from £380 to £1430 a year and the minimum grant after the increase was about £430.

[Note by me ... these were Grants not Loans].

Creation of the Student Loans Company
Student Loans in their original form were brought in under the Conservative Government of Margaret Thatcher .. who was succeeded by another Conservative Prime Minister, Sir John Major.
The SLC (Student Loans Company) was founded for the 1990/91 academic year to provide students with additional help towards living costs in the form of low-interest loans.
In its first year, the SLC gave loans to 180,200 students ... representing a take up rate of 28% of eligible students, with an average loan of £390.

[Note by me ... this is the introduction of repayable Loans in 1990/91, not 1998/99].

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Replying to Hugo Fair:
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By bendybod
14th Feb 2023 09:57

I definitely had a student loan before the academic year 1998/99. I graduated in 98.

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Replying to bendybod:
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By Hugo Fair
14th Feb 2023 12:10

Which is what I said in my post immediately preceding yours:
"this is the introduction of repayable Loans in 1990/91, not 1998/99"!

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By richard thomas
12th Feb 2023 11:05

Just one minor point. "Unearned income" does not include trading income (or FHL income) - reg 29(5)(a) of the Student Loan Repayment regulations.

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Replying to richard thomas:
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By Susan56
13th Feb 2023 16:54

I always felt aggrieved about SL being charged on pension income. It wasn't unearned in any sense of the word - I worked a long time to get it then had to draw the pension early due to redundancy, so I lost out all round. The when I got back in work again I was charged tax and of course student loan on it which was a double whammy since SL payroll deductions are not made from pension payments.

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By vstrad
13th Feb 2023 10:56

We could remove all this complication by making universities responsible for providing student loans. This would give them an incentive to turn out graduates who were employable.

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