Managing student and postgraduate loans on payroll is a crucial responsibility for employers, considering that approximately 1.5 million students in the UK receive loans each year. As these students enter the workforce, loan repayments begin, with deductions made from their salaries every month. To effectively handle these student loans on payroll, it is essential to understand the repayment options and thresholds associated with each plan.
Student Loan Repayment Plans:
Plan 1:
- Applies to students who took out a loan between September 1, 1998, and August 30, 2012, while studying in England, Wales, or Northern Ireland.
- The current repayment threshold is an annual salary of £22,015.
- If an employee’s earnings exceed this threshold, they will pay nine percent of the difference between £22,015 and their salary.
Plan 2:
- Pertains to students in England and Wales who obtained loans between September 1, 2012, and July 31, 2023.
- The current repayment threshold for Plan 2 loans is £27,295.
- Employees earning above this threshold will contribute nine percent of any amount exceeding it.
Plan 4:
- Exclusive to students in Scotland who have taken out loans since September 1, 1998.
- No deductions are made until the employee earns more than £27,660.
- Once the threshold is surpassed, nine percent of the additional income is payable.
Plan 5:
- Introduced by the government for students in England who receive loans starting from August 1, 2023.
- The repayment threshold for Plan 5 is set at £25,000.
- Employees will contribute nine percent of any earnings above this threshold, with the initial repayment occurring no earlier than the 2026/27 tax year.
Postgraduate Loan Plan:
- Varies by country.
- In England and Wales, employees will pay six percent on income exceeding £21,000.
- In Scotland, the rate is nine percent for earnings beyond £25,375.
- Northern Ireland follows the same nine percent rate but with a threshold of £20,195.
Incorporating Student Loans into Payroll:
To ensure the correct repayment plan is applied to each employee, employers need to obtain a student loan start notice (SL1) or postgraduate loan start notice (PGL1) from HM Revenue & Customs (HMRC). If these forms are not received or the employee is uncertain about their plan, they can visit the government’s website for guidance on repaying student loans.
During payroll processing, deduct the appropriate loan amount from the employee’s pay record. Remember to calculate National Insurance Contributions (NICs) before deducting the loan repayment but prior to calculating income tax. Report these deductions to HMRC through Full Payment Submission (FPS), which must be submitted on or before each payday.
Ceasing Student Loan Repayments:
If an SL2 or PGL2 stop notice is received from HMRC, requesting the cessation of loan deductions, employers must stop making deductions from the employee’s salary on the first available payday after the deduction stop date specified in the notice.
It is important to note that employees cannot request the termination of student loan repayments; only HMRC can do so. If an employee believes they have overpaid, they should contact the Student Loans Company for assistance.
By obtaining accurate information from employees and HMRC, managing student and postgraduate loans on payroll can be a seamless process. Stay informed about the different plan structures, including the upcoming Plan 5 in August 2023, and promptly halt payments when requested by HMRC. Contact Payroll Umbrella Services for help, our team handle outsourcing all your payroll and deal with all HMRC guidelines.
