Press release: Loan repayments may come as an unwelcome shock
The Low Incomes Tax Reform Group (LITRG) is warning employers and affected employees that postgraduate loan repayments will start from next month (April). It is important that both parties understand whether there will be further deductions from payslips and, if so, that they are correct.
Postgraduate loan repayments will start from the 2019/20 tax year for borrowers earning over £21,000 annually. Unless borrowers are working overseas these repayments are made through the tax system, therefore it is important that employers, as well as their employees, understand the changes. Borrowers who are self-employed or have unearned income pay student loan repayments through the Self Assessment process.
LITRG is concerned that borrowers may not understand how their repayments are calculated and will turn to their employers to help understand the deductions on their payslips. There is added complexity because unlike Plan 1 and Plan 2 graduate loans, the deductions for postgraduate loans can be taken simultaneously alongside any graduate loans and use a different repayment rate.
Head of Team at LITRG Victoria Todd said:
“From April it is possible to be repaying both graduate and postgraduate loans simultaneously at a combined rate of 15 per cent of income above the loan repayment thresholds. This could be a sizeable proportion of a new postgraduate’s income as they start work for the first time and have other significant costs. We want to ensure that the loan repayments do not come as an unwelcome shock and they are budgeted for.
“We are concerned that borrowers and their employers will not understand how the loan repayments have been calculated and so will not be able to check if the correct repayments have been deducted. All three loan types (Plan 1 and Plan 2 graduate loans and postgraduate loans) use different repayment thresholds; the postgraduate loan repayment rate is six per cent whereas the graduate repayment rates are nine per cent. This added complexity could make it difficult for affected employees to understand their payslips in conjunction with other changes such as an increase in pension auto enrolment contributions; in fact a basic rate taxpayer could be seeing deductions of 52 pence per £1 earned above their tax and repayment thresholds.”1
In order for HMRC to calculate the correct loan repayments, LITRG is reminding student loan borrowers to ensure they inform their employer of the types of loans they have when they start a new job. They should also confirm whether they are repaying the Student Loan Company directly, which may be the case if they are nearing the end of repaying their loan.
- Based on deductions of 20 per cent income tax, nine per cent graduate loan, six per cent postgraduate loan, 12 per cent employee’s NIC, pension auto enrolment employee’s five per cent.
- Only income-contingent loans are collected through the Pay As You Earn (PAYE) and Self Assessment tax system.
- Rates and thresholds for student loan deductions for employers are on GOV.UK - here.
- There is also a repayment threshold for unearned income such as rent and savings income of £2,000.
- Pension auto enrolment contributions are increasing from April 2019 for employees from three per cent to five per cent.