Tricky student loan repayment questions

Claire Thackaberry’s article How student loan repayments work in practice prompted a number of interesting queries, which she addresses here.

Fluctuating earnings

If a borrower has fluctuating PAYE earnings, is the student loan deduction calculated cumulatively month-on-month within one tax year? Say pay for month 1 is over the monthly repayment threshold and the pay for month 2 is under the monthly threshold, will there be an automatic adjustment in month 2 or a wrap-up adjustment made at the end of the tax year?

Answer:

Student loan repayments are not calculated cumulatively, but on a pay-period basis in a similar way to National Insurance contributions. This is explained in the Tax Guide for Students in an example for a Plan 2 loan.

There is no automatic adjustment for over/underpayments in subsequent months or at the tax year-end under the PAYE mechanism. However, if the taxpayer is not in self assessment and has earned under the student loan repayment threshold over the tax year, they can apply to the SLC for a repayment of the student loan deductions overpaid. See this example on the Tax Guide for Students website.

Payments on account

My son has been asked for repayment of student loans through the tax payments on account statement for several years. He was even charged interest for non-payment this year even though he included enough in his payment on account to repay the loan completely.

Answer:

Student loans are not included in self assessment payments on account. They should only be included in the balancing payment paid in January after the tax year end.

The interest on the student loan is charged on the outstanding loan balance until the balancing payment is due. Making the payment to the SLC earlier in the tax year, for example, using a Budget Payment Plan for self assessment, will not reduce the interest charged on the student loan. This is explained in more detail on the Tax Guide for Students website.

Why doesn’t HMRC stop collection?

Is HMRC advised by SLC of the outstanding balances on student loans? It appears that HMRC simply assumed that the taxpayer should be paying the same this year as the previous year ie more than the outstanding loan.

Answer:

HMRC is advised by the Student Loan Company of the outstanding balances on taxpayer’s loans but this will be after the self assessment filing deadline for the tax year. There is an option to pay the SLC directly when the taxpayer is coming towards the end of repaying their student loan. This option is usually provided two years before the expected repayment date of the entire loan. This should stop any overpayments being made.

For more on the work done by the Low Incomes Tax Reform Group visit their website.