If you’ve recently made the switch from full-time employment to contracting, you may be wondering how your student loan repayments are calculated. Here’s an overview of what you need to know.

Student loan repayment rules for contractors

As a full-time employee, your student loan repayments would have been calculated based on your wage. If you earn more than the minimum threshold for your payment plan, you will pay the Student Loans Company (SLC) 9% of what you earn, and it is collected automatically through the PAYE system either weekly or monthly. You would be able to check your payslips or P60 form to see how much of your loan you have paid off during the tax year.

Sole traders and limited company contractors have a slightly different set of rules. Yes, they are expected to pay back the same amount and they too are subject to the same earning thresholds (more on that to follow). However, unlike employees who have it deducted from their pay, repayments will come out as one lump sum as part of your annual Self-Assessment tax return.

Arranging your student loan repayment as a contractor

HMRC and SLC rely on you as the contractor to arrange your student loan repayments as part of your Self-Assessment tax return. You’ll need to complete the Student Loan repayment section if SLC has informed you that your repayments were due to start on or before 6 April of this year (or they’re continuing from previous years).

As already mentioned, when it comes to repayments, all Plan 1 and Plan 2 student loan holders are required to pay back 9% of their annual income that falls above the threshold.

The Plan 1 threshold for the 2019/20 tax year is £18,935.

The Plan 2 threshold is £25,725.

You can check with SLC if you’re unsure which plan you fall under. And if you earn less than the appropriate threshold, you don’t have to make any repayments.

If you’re recently made the switch to sole trader or limited company contractor, you’ll also need details of any amounts already deducted through your previous employment.

Calculating student loan repayments for sole traders

You or your accountant will need to calculate the repayment amount you owe SLC and include it on your Self-Assessment return by the 31 January deadline. To do this, you will need to:

  • Calculate your annual gross income, which includes your gross salary and any other earnings
  • Subtract the threshold that applies to you (either £18,935 or £25,725 from Plans 1 or 2) from your annual gross income to see how much over the threshold you are
  • Your student loan repayment for the year will be 9% of the remaining amount.

It’s important you submit your annual self-assessment and payment for all outstanding tax liabilities, including your student loan, by 31 January to avoid any fines or penalties. HMRC will then pass the details of your student loan repayment to SLC, who will credit your loan account accordingly.

Calculating repayments for limited company contractors

Limited company contractors follow the same process, but their annual gross income must include their salary, dividends and any other income, such as rental income.

So even if you choose to pay yourself a more tax-efficient low salary, remember that your higher dividends will be taken into account too. Both the salary and dividends are added together to give a contractor’s gross income on which the student loan repayment is calculated.

It is critical that both you and any other listed directors within your limited company tick the relevant box during your self-assessment tax return. This will ensure that repayments are calculated properly in your overall tax bill.

Again, payment is due by 31 January each year.

Preventing student loan overpayment as a contractor

You’ll need to say if you think you may fully repay your student loan within the next two years. You can do this by indicating so on the self-assessment form. This will help you avoid over-repaying your student loan as you get close to final settlement. HMRC will verify this information with SLC, who will confirm whether or not the figures calculated will exceed your loan balance.

If you think you are set to pay too much in a tax year, unfortunately, you can’t reduce your repayment from your self-assessment tax return. However, you can write to HMRC and ask them to suspend a certain amount from collection until SLC confirms how much is due. Be careful though. If you are then asked to pay back more than you expected, you will be subjected to backdated interest as well as a possible surcharge.

Making voluntary student loan payments as a contractor

When business is going strong, you may choose to make additional repayments to SLC to reduce your overall balance. This can help to shorten the overall length of your loan and cut down on the amount of interest you are charged. Remember, though, even if you make extra voluntary payments, these will be treated as additional ones to the amount HMRC will collect through self-assessment. You won’t be able to reduce the repayment amount calculated through this process.

To find out more about contracting, running your own limited company, tax returns and more, head to our Knowledge Hub for the latest industry insights.

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