How do I account for student loans in payroll?
10/03/2023
As an employer, you need to ensure you are making the necessary deductions from your employee’s pay. Student loans are likely to crop up and when they do, you need to know how to approach them.
To account for student loans in payroll, follow these steps:
Step 1: Determine the employee’s student loan plan type
The first step is to determine which type of student loan your employee took out.
Plan 1 applies to employees who took out student loans before September 2012. The threshold to repay this loan is currently £20,195 per year.
Plan 2 applies to employees who took out student loans after September 2012 and they will need to repay this loan if they earn at least £27,295 annually.
Scottish students that started their undergraduate course on or after 1 September 1998 will have Plan 4. EU students that studied in Scotland at this time will also have this plan. The current repayment threshold is £25,375 a year.
The newest plan, Plan 5, will apply to students that start their course on or after 1 August 2023.
Employees could also have a postgraduate loan plan, which they will need to repay if they earn over £21,000 a year.
Step 2: Calculate the employee’s repayment amount
Once you know the employee’s student loan plan type, you can use HM Revenue & Customs’ online calculator to calculate the correct amount of loan repayment to deduct from their salary.
The repayment amount depends on the employee’s income and the student loan plan type.
For Plans 1, 2 and 4, employees will repay 9 per cent of the amount they earn over the minimum threshold.
Whereas, employees with postgraduate loans will repay 6 per cent of their salary above the threshold.
Step 3: Deduct the repayment amount from the employee’s salary
You must deduct the correct amount of loan repayment from your employee’s salary each month. Deductions are made from the employee’s gross pay and can be done automatically through the PAYE system.
It is important to note that employees who finished their studies in the current tax year will not start to repay their loans until the next tax year.
Step 4: Report the loan repayment deductions to HMRC
Finally, you must report the amount of loan repayment deductions made from your employee’s salary to HMRC each month.
You must keep records of all wages and deductions, along with any student loan start and stop notices for at least three years.
What if the employee has more than one plan type?
If the employee has more than one student loan plan, you need to start deductions for the plan with the lowest recovery threshold, until you get a student loan start notice (SL1).
What if their pay changes during the tax year?
If an employee started the tax year earning under the repayment threshold but a pay increase brings them above this, you will need to adjust the repayments accordingly.
If their pay drops below the threshold, repayments should be stopped.
Other circumstances, such as if the employee has a second job, can complicate matters. You may need to use the aggregate rules to determine how to calculate their student loan deductions. Or you may be able to ignore the earnings from the other job and make the deductions in line with their earnings with you.
It is important to keep up-to-date with changes to the repayment threshold and student loan plan types to ensure that you are deducting the correct amount from your employee’s salary each month.
Need advice on student loan deductions and other payroll matters? Get in touch.