Recruiting and calculating student loan deductions

20th September 2021

If you have recruited, or are considering taking on, an employee with a student loan of some type here is what you need to know about student loan deductions …

The autumn is here and, post-lockdown, business leaders are reviewing their goals and plans, including their staffing requirements.

Although none of us know for sure how the next six months will go, COVID-19 vaccinations continue to give hope that there will be less disruption to the working week than last year.

The Coronavirus Job Retention Scheme closes on 30th September and some businesses will be welcoming back furloughed employees. But there are many job positions to fill: ONS figures show that In May to July 2021, the estimated number of vacancies increased to 953,000, its highest level since records began in 2001.

The number of job vacancies in May to July 2021 was 21.4% (168,000) above its pre-coronavirus (COVID-19) pandemic level (January to March 2020), with only one industry, wholesale and retail trade and repair of motor vehicles, remaining below its pre-pandemic level.

Some employers are finding it hard to recruit but there are opportunities to appoint from the new cohort of student leavers. If you are considering doing this – or if you have already taken on a young person who has a student loan, be aware of the rules for repayment and the student loan types. As an employer you will probably need to make deductions for their student loans …

Student loan deductions

In April 2021, a new Scottish Student Loan type was introduced by the Government – so there are four types of student loans. These are collected through Pay As You Earn and the Self-Assessment system so you need to be clear who is responsible for ensuring this happens. Each loan and plan type has different thresholds and some have different rates for calculating deductions.

It is important to apply the right loan type to ensure your employee doesn’t pay more interest than they should to the Student Loans Company and receives the right amount of pay.

Student Loans (SL) and Postgraduate Loans (PGL) thresholds and rates

The thresholds for making loan deductions are:

SL Plan 1 – £19,895 annually (£1,657.91 a month or £382.59 a week)
SL Plan 2 – £27,295 annually (£2,274.58 a month or £524.90 a week)
SSL Plan 4 – £25,000 annually (£2,083.33 a month or £480.76 a week). This new plan type is for Scottish Student Loans. If your employee was a Scottish student who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998, they will be on repayment Plan 4. They will also be on Plan 4 if they were an EU student who started an undergraduate or postgraduate course in Scotland on or after 1 September 1998.

Employees repay 9% of the amount they earn over the threshold for Plans 1,2 and 4.
Postgraduate loans (PGL) – £21,000 (£1,750 a month or £403.84 a week). Employees repay 6% of the amount they earn over the threshold for PGL.

How to calculate the deductions

It is important that you start making loan deductions from the next available payday using the correct plan or loan type or both. That is, you should work out the correct figure of employee earnings according to which Student Loan and PGL deductions are due. Your employee may be liable to repay a PGL and a Plan 1, Plan 2 or Plan 4.

Use the same gross pay amount that you would to calculate your employer’s secondary Class 1 National Insurance contributions. You should record them on your Full Payment Submission.

You may receive a notice to pay deductions from HMRC so check your online account for either student loan or postgraduate loan (or both), start and stop notices. If you receive a start notice from HMRC about these loans you should use the correct loan or plan type (as above). Note the start date shown on the notice and take deductions from the next available pay day.

NOTE: If you are operating off-payroll you are not responsible for deducting student or postgraduate loan repayments for workers engaged through their own companies. The worker should account for student loan obligations in their tax return.

See the Government website for further details.

As accountants and tax advisers, we know that recruitment and employment issues generally can be time-consuming and complex. If you would like to talk to us about any of these topics, please contact us.

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