Student Loan Repayments for Contractors

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Student loans are increasingly common in the UK, with the rising cost of higher education resulting in record numbers of students seeking financial aid. As a result, student loan repayments will remain a constant financial consideration.

Anyone who’s taken out a student loan must make repayments to the Student Loans Company (SLC). That's as long as your annual salary is above the threshold limit, which currently stands at £18,935 (if you are classified as a Plan 1 borrower) or £25,725 (if you are classified as Plan 2). We’ll elaborate on these plans below. For now, remember that anyone earning less than this isn’t required to make repayments.

SLC Repayments as a Contractor

For self-employed freelancers and permanent workers, two different approaches tend to be the norm in terms of SLC repayment. Traditionally, full-time employees have student loan repayments made on their behalf via their employer, which are simply deducted from their pay cheque each week or month.

By contrast for contractors, student loan repayments are normally made in one annual lump sum. That’s assuming your gross income is above the threshold limit. This is a calculation that is made using your self-assessment tax return.

Contractors and the Plan 1/Plan 2 Student Loan Stipulations

Depending on when you graduated from university, you will need to repay your student loan under Plan 1 or Plan 2. They are comprised of the following stipulations according to Student Loan Company website:

Plan 1 Plan 2
This plan applies to you if you took out your student loan:

in Scotland or Northern Ireland, or received EU funding, at any time in Scotland or Northern Ireland, or;

before 1st September 2012, and:
you lived in England or Wales, or;
received EU funding in England or Wales
This plan applies to you if you took out your student loan:

on or after 1st September 2012, and:
you lived in England or Wales, or;
received EU funding in England or Wales
you lived in England and took an Advanced Learner Loan for a further education course.

Essentially, the operative date here is 1 September 2012. But how does it change things in terms of paying it back?

Let’s delve into how each plan could affect your repayment requirements and schedule.

Plan 1: Student loans issued prior to 1 September 2012

When it comes to repayments, all student loan holders – be they plan 1 or plan 2 – are required to pay back 9% of their annual income that falls above the threshold.

For those falling under Plan 1, as stated earlier, the threshold is now at £18,935 per year. Adding together your salary and dividends will provide gross income, which is then used to calculate the repayments you owe.

For example:

Your annual salary: £20,000 + Company dividends: £30,000 = Gross income: £50,000

Gross income: £50,000 – Student loan threshold: £18,935 = Total income above the threshold: £31,065

Annual Student Loan Repayment (9% of £31,065) = £2,795.85

All student loan repayments that are made to HMRC will be deducted from your overall student loan balance with the SLC. Therefore, they would deduct that £2,795.85 figure above.

Plan 2: Student loans issued on or after 1 September 2012

A student loan issued during or after 1st September 2012 is subject to a threshold of £25,725 per year, of which you are again required to pay 9% on. When calculating repayments, any dividends you receive count towards your gross income, unless they’re below £2,000 in total – in which case they will be disregarded.

So let’s take the same example we used above, but apply it to a Plan 2 repayment situation:

Your annual salary: £20,000 + Company dividends: £30,000 = Gross income: £50,000

Gross income: £50,000 – Student loan threshold: £25,725 = Total income above the threshold: £24,275

Annual Student Loan Repayment (9% of £24,275) = £2,184.75

Once again, student loan repayments to HMRC will be deducted from the overall student loan balance.

Student loans and what to do at self-assessment time

It is vital that both you and any other listed directors at your limited company tick the relevant box during your self-assessment tax return. This will ensure that repayments are calculated within your overall tax bill. As with annual tax repayments and National Insurance contributions, contractors must be proactive and plan ahead for their annual repayments.

If you’re a Limited company contractor and have any questions about managing your student loan, then contact us today on 0800 032 5326. Alternatively, if you are an existing ClearSky client, please speak to your Personal Accountant.