⚠️ Our Tax Guide for Students guidance has moved to the LITRG website. If you are a student or have a student loan and have a query about any of the issues we cover in the section, please let us know by filling in the Contact Us form.
I am an employee. How do I make Plan 1 student loan repayments?
Employee student loan repayments come off your wages before you get them – check your payslips!
⚠️ This page is for employees within the UK tax system for those with Plan 1 income-contingent student loans. There are separate pages on Plan 2 loans and postgraduate loans. You should contact the Student Loans Company (SLC) if you are unsure which type of loan you have.
If you have gone to work abroad and are not in the UK tax system, you will need to make a payment arrangement direct with the SLC.
How do Pay As You Earn (PAYE) Plan 1 student loan repayments work?
Your employer is usually tasked with taking student loan repayments off your wages through Pay As You Earn (PAYE). They pay them to HM Revenue & Customs (HMRC) who then pay them to the Student Loans Company (SLC). The SLC then show your new loan balance on your borrower account with them however this may take some time to be updated in order to show an accurate position. But if you are nearing repayment of your loan in full, you can sometimes ‘opt out’ of PAYE and arrange a direct debit to the SLC instead.
If you are employed at the beginning of the tax year in which you are due to start making repayments, the SLC should notify HMRC. HMRC in turn issue a ‘start notice’ to your employer who will then calculate student loan deductions along with your tax and National Insurance contributions and pay them to HMRC through the PAYE system.
But when you start a job, as part of their new starter checklist (previously known as Form P46), your employer should ask you whether you have a student loan on which you are due to start making repayments. Your employer will also ask what type of loan you have, it is important that you provide the correct information as this will affect what loan repayments you make. We provide an annotated example of a starter checklist to help explain how you should answer the questions so that the correct loan repayments are made.
The exact process depends on timing – let us look at a couple of examples.
Example 1: Jann, new starter employee
Jann, originally from Scotland, left university in the summer of 2020 and got a job straight away. He had no P45 so his employer asked for information to complete the new starter checklist.
Although Jann has a Plan 1 income-contingent student loan, he didn’t leave his course before last 6 April, so his employer was not required to start deducting loan repayments even if Jann was earning over the repayment threshold.
But from April 2021 HMRC should issue a ‘start notice’ to his employer and if Jann is earning more than the threshold, loan deductions will begin.
So, let’s illustrate how this works:
Example 2: Francesca
Francesca, who is also from Scotland and has a Plan 1 income-contingent student loan, leaves university at the same time as Jann, in the summer of 2020 but cannot find work straight away.
She finds a job in May 2021 and her employer requests information to complete a new starter checklist. Unlike Jann, because she left her course before 6 April 2021, if Francesca’s income is high enough, her employer will have to start making deductions from her pay immediately.
What are employed ‘earnings’ for Plan 1 student loan repayments?
Your earnings for student loan purposes are calculated in the same way as they are for National Insurance contributions (NIC). This is not always the same figure as the earnings on which you pay tax. For example, NIC is not due on loans your employer makes to you and GOV.UK gives some guidance on tax and NIC differences where you receive tips or other company benefits.
Pensions that you receive are not counted as earned income, but as unearned income so may affect the amount you are required to pay back on your student loan if you complete a tax return. Normally pension contributions that you make through your payroll will be deducted from your pay for income tax purposes, but they will not reduce your pay for National Insurance purposes and hence will be included when calculating student loan repayments.
Any income from employment which you earn before the date you are due to start making repayments should not be taken into account in calculating the amount you have to pay.
How are Plan 1 repayments calculated?
Plan 1 student loan repayments are due at a rate of 9% on your earnings over the repayment threshold (this is £19,390 a year for 2020/21, which works out at £1,615.83 a month or £372.88 a week).
Each pay day is looked at separately. Your repayments may vary according to how much you are paid in any particular week or month. If your income falls below the starting limit for that week or month, your employer should not make a deduction.
In summary, your employer has to calculate and deduct repayments each pay day and you can only get a refund based on your annual earnings if your income for the tax year is less than the repayment threshold of £19,390. You will receive a refund through the Self Assessment system if you have to complete a Self Assessment tax return or if you do not complete a tax return you can apply to the SLC for a refund (see I have earned less than the repayment threshold. Can I get a refund? below).
Jack is paid monthly. His employer has received the HMRC 'start notice' to begin deducting Plan 1 student loan repayments from 6 April 2020 if his income goes over the threshold – £19,390 a year works out to £1,616 a month.
Jack's basic salary is £16,000 a year, or £1,333 a month, but the summer months are busy and he has to work overtime. In July he earns an extra £450 and notices that a deduction has been made from his pay for student loan repayments. He asks how this was calculated and why he has to pay for it.
His employer explains that his total pay in July was £1,783, which is £167 more than the £1,616 a month threshold for loan repayments. This £167 is multiplied by 9% to give a student loan deduction of £15.03.
So, as you can see from the example above, student loan deductions are calculated on a ‘per pay period’ basis. This is how National Insurance contributions (NIC) are worked out. In most cases this is week by week or month by month according to how frequently you are paid.
This means that in the example above, Jack’s employer cannot take account of any ‘spare allowance’ up to the £19,390 a year limit in calculating the July deduction, and cannot refund it in a later month when Jack’s wages fall back below the starting point.
If Jack was in the Self Assessment system, he might, however, obtain a refund when his final loan deductions are worked out according to the total income on his tax return. Alternatively, Jack could ask the SLC for a refund after the end of the tax year if his income is below the threshold (See below).
I have earned less than the repayment threshold. Can I get a refund?
You cannot get a refund of deductions via the Pay As You Earn (PAYE) system. So in the example of Jack (see example in the section above), even when his earnings drop back after the busy summer months, his employer will not refund the deduction made in the earlier month. If he does not fill in tax returns, the only way Jack can get a refund of the £15.03 deduction is to apply direct to the SLC. He will have to show that his total earnings in the tax year did not exceed £19,390. If he does not ask the SLC for a refund, the amount will go towards paying off his loan more quickly.
What happens if I have more than one job?
If you have more than one employment and work for different employers, your Plan 1 student loan deductions are calculated separately on each one. Again, this follows a similar principle to National Insurance contributions (NIC), which are usually calculated on a job-by-job basis.
Katrina has an income-based Plan 1 student loan. She works part-time at Company A, earning £13,500 a year. As she is not earning above the threshold, she does not have to make loan repayments.
In April 2020, she gets another part-time job for Company B, earning £7,000 a year. Company B is not in any way related to Company A.
Even though her total earnings are now £20,500 a year, neither employer has to deduct student loan repayments as each is within the £19,390 threshold.
However, if Katrina were required by HMRC to fill in a tax return, both employments would be combined in the overall student loan repayment calculation and she would then have to make repayments based upon her total earnings of £20,500. There is more on Self Assessment on a later page.
When can I opt out of PAYE Plan 1 repayments?
You cannot normally pick and choose how you repay your Plan 1 income-contingent student loan. If you are an employee, then Pay As You Earn (PAYE) deductions are mandatory in most cases.
But if you are getting close to full repayment, you are recommended by the SLC to switch to direct debit repayments to avoid paying too much through PAYE and then having to get a refund from the SLC.
This is because PAYE deductions are calculated at 9% of pay above £19,390 (for the tax year 2020/21) and even though HMRC and the SLC are working towards more frequent data sharing which should mean that your SLC account is updated regularly it may not be completely accurate. Therefore, it is still recommended to pay the SLC directly during the final two years of loan repayments.
The direct debit facility allows you to opt out of PAYE deductions up to two years prior to anticipated full repayment.
The SLC should monitor borrowers' accounts with a view to identifying if you are getting close to full repayment and contact you to offer the switch to direct debit. But if your income fluctuates or if there is a delay in HMRC passing repayment information to the SLC, it could be difficult for the SLC to determine when you might be nearing full repayment.
In these situations, you can contact the SLC and, on production of evidence such as your P60 and payslips, you may be able to agree with them a move to direct debit. You should ensure that the SLC have up-to-date contact details for you.
If you do not keep up your direct debit repayments, you will go back into the PAYE repayment system.
Watch out if you change jobs
Where you have switched to direct debit repayments and then move jobs, you must take care when providing new starter information so that you do not pay twice – by both direct debit and through PAYE. This means that if you have agreed with the SLC to pay by direct debit, you must notify your employer that you are making direct monthly repayments through an agreement with the SLC.
If you have already overpaid then you should contact the SLC as soon as possible and ensure they have your correct bank details. But be wary of any phishing emails or phone calls from fraudsters pretending to be the SLC!