Making arrangements to repay your student loan when you become self-employed, is down to you much like arranging your own taxes and pension. But if you’re a university graduate, you’ll still have to repay it regardless of your employment status. In this guide, you’ll learn how repayments must be made, when they start and how to declare them to HMRC.
I’ve updated this guide on 14 December 2020 for changes in the latest legislation
Table of Contents
- 1. Repaying Your Student Loan When You’re Self-Employed
- 2. What are the Student Loan Repayment Plans?
- 3. Student Loan Repayment Thresholds
- 4. What Happens If Your Income Changes
- 5. How to Repay Your Student Loan on Your Self-Assessment Tax Return
- 6. Making Extra Payments
- 7. When Are Student Loans Written Off
- 8. How is Student Loan Interest Calculated
1. Repaying Your Student Loan When You’re Self-Employed
Repaying your student loans when you’re self-employed is handled as part of your HMRC self assessment. In other words, just like your income and expenses, you’ll need to include details when you fill in your tax return each year.
If you’re employed and self employed, you should double-check with your employer or on your payslip whether you are repaying your student loan through your PAYE salary so you don’t overpay unnecessarily. You would have selected to do this when you started work and filled out your employee starter form.
2. What are the Student Loan Repayment Plans?
HMRC has three types of student loan repayments plans in place, the plan you need to follow depends on when you started your undergraduate course and the type of course you have taken. If you have more than one loan you may be on more than one plan, so double check all your paperwork to help decide which ones apply to you. The three student loan repayment plans are:
2.1 Plan 1
Student loan plan 1 is for the following individuals:
- English or Welsh students who started an undergraduate course anywhere in the UK before 1 September 2012;
- Scottish or Northern Irish students who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998;
- EU students who started an undergraduate course in England or Wales between 1 September 1998 and 1 September 2012;
- EU students who started an undergraduate or postgraduate course in Scotland or Northern Ireland after 1 September 1998.
2.2 Plan 2
Student loan plan 2 is for the following individuals:
- English or Welsh students who started an undergraduate course anywhere in the UK on or after 1 September 2012;
- EU students who started an undergraduate course in England or Wales on or after 1 September 2012;
- Anyone who took out an advanced learner loan on or after 1 August 2013.
2.3 Postgraduate Loan
The rules of the postgraduate loan repayment plan apply if you’re:
- an English or Welsh student who took out a Postgraduate Master’s Loan on or after 1 August 2016;
- an English or Welsh student who took out a Postgraduate Doctoral Loan on or after 1 August 2018;
- an EU student who started a postgraduate course on or after 1 August 2016.
- 9% of the amount you earn over the threshold for Plan 1 and 2
- 6% of the amount you earn over the threshold for the Postgraduate Loan
3. Student Loan Repayment Thresholds
Whether you are employed or self employed, the repayment thresholds are the same. For all schemes, you’ll be expected to start making student loan repayments from the April (which is the start of the new tax year) after you graduate, assuming you earn above the thresholds. So say you graduate in July 2020 you’ll need to start repaying your student loans from April 2021.
That means if you’re self-employed you’ll need to include your student loan on your self assessment for 2021/2022 which must be filed online by 31 January 2022.
You’ll need to pay a percentage of your gross income above the thresholds set by HMRC, so that means everyone can earn up to the threshold without having to make repayments, regardless of their income:
|Income Threshold 2020/2021||Income Threshold 2021/2022||What You’ll Pay|
If you have a Plan 1 or 2 loan as well as a Postgraduate Loan, you’ll repay 15% (9% + 6%) of the amount you earn over the threshold.
3.1 Example of Plan 1 Student Loan Repayments
You earn £30,000 per annum for the 2020/2021 tax year, which is over the threshold of £19,390. That means you’ll repay £954.90 (£30,000 – £19,390 x 9%) of your student loan for the year.
3.2 Example of Postgraduate Loan and a Plan 2 loan.
You earn £35,000 during the tax year 2020/2021 and have a postgraduate as well as a plan 2 loan. Your income is over both the plan 2 and postgrad loan thresholds.
You will need to repay £758.25 (£35,000 – £26,575 x 9%) of your plan 2 loan and £840 (£35,000 – £21,000 x 6%) of your postgrad loan.
4. What Happens If Your Income Changes
If you’re self-employed you’ll declare your student loan once a year on your tax return, so your repayments will be based on your total income meaning it’s irrelevant if your income fluctuates. Although if your earnings do take a dip you can apply to reduce your payment on account due by 31 July.
If you are employed however and your earnings take a dip and fall below the threshold, then you can apply for a student loan refund by contacting the Student Loans Company on 0300 100 0611.
5. How to Repay Your Student Loan on Your Self-Assessment Tax Return
You’ll need to complete the student loan section of your self-assessment tax return if the SLC has told you that you need to start making repayments in Section 2 ‘Tell Us About You’ of your tax return.
If You Have Less Than 2 Years On Your Student Loan, then you’ll notice there is a separate box on your tax return where you can let HMRC know if you have less than two years left on your student loan. By ticking this box you’ll notify HMRC that you want them to calculate your student loan repayments slightly differently to avoid you overpaying.
Once you’ve completed your tax return and paid your self assessment tax, HMRC will pass pass your student loan repayments onto the SLC on your behalf, who will update your loan account accordingly.
6. Making Extra Payments
You can choose to make extra payments to clear your student loan quicker once your income goes over the income threshold. Any extra repayments are non refundable, so you should make sure you are happy with giving the money and most importantly you should only do this if you know you will be clearing the loan in full. This is because students loans can be written off in full and you’ll simply lose your money.
7. When Are Student Loans Written Off
There are rules in place that mean student loans are written off depending on plan type, where you are from and when you took your loan. Here’s how each plan works:
7.1 Plan 1 Write Off
If you are from England, Northern Ireland and Wales you loan will be written off according to when you took it out:
- When you’re 65 if you took out the loan in academic year 2005/2006 or earlier
- 25 years after the April you were first due to repay if you took out the loan in academic year 2006/2007 or later
7.2 Plan 2 Write Off
Plan 2 loans are written off 30 years after the April you were first due to repay.
7.3 Postgraduate Loans Write Off
Postgraduate loans are written off 30 years after the April you were first due to repay if you are a student from England or Wales.
8. How is Student Loan Interest Calculated
The amount of interest you pay on your student loan again depends on the plan you are on and your income if you are on plan 2.
8.1 Plan 1 Interest
You currently pay interest of 1.1% on Plan 1.
8.2 Plan 2 Interest
While you are studying you’ll pay interest of 5.6% on plan 2 loans, calculated as the retail price index, currently 2.6%, plus 3%. After this the interest you’ll pay will depend on your annual income:
- £26,575 or less – RPI (currently 2.6%)
- £26,576 and over – RPI (currently 2.6%), plus up to 3%
8.3 Postgraduate Loan Interest
The current interest rate is 5.6% on postgraduate loans, calculated as the retail price index, currently 2.6%, plus 3%