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How do I pay back a student loan when I’m self-employed?

Posted on Dec 26th, 2018 | Personal finance

How do I pay back a student loan when I’m self-employed?, image of students walking

Student loan repayment is the ugly side of university life. It’s a daunting debt as it is, but it can be even scarier for the self-employed. As a freelancer, contractor, or small business owner, your student loan repayments will need to be included on your annual Self Assessment tax return.

Confused about how to go about managing your repayments? Don’t sweat, here’s everything you need to know about paying back a student loan when you’re self-employed.

How much do I need to be earning before repayment starts?

If you took out your loan in England or Wales before 1st September 2012, you will repay your loan under HMRC’s Plan 1. You’ll start repaying your student loan the April after you leave your course if your income is over £352 a week or £1,527 a month (before tax and other deductions). This is a salary of £18,330 per annum.

You’re on Plan 2 if you’re an English or Welsh student who started your undergraduate course on or after 1st September 2012. The earliest you start repaying is when your income is over £480 a week or £2,083 a month (before tax and other deductions). This is a salary of £25,000 per annum. You start your repayments on either the:

  • first April after you leave your course
  • April four years after the course started, if you’re studying part-time.

Students who took out loans in Scotland or Northern Ireland are only affected by Plan 1. Please note the thresholds highlighted above relate to the tax year ending 5th April 2019.

Repayment thresholds from previous years are available here.

Postgraduate Loan

You’re on a Postgraduate Loan repayment plan if you’re an English or Welsh student who took out a Postgraduate Master’s Loan or Postgraduate Doctoral Loan.

If you took out a Master’s loan, the earliest you start repaying is when your income is over £404 a week or £1,750 a month (before tax and other deductions). This is a salary of £21,000 per annum and it’s payable from the first April after you leave your course.

If you took out a Doctoral loan, the earliest you start repaying is when your income is over £404 a week or £1,750 a month (before tax and other deductions). This is a salary of £21,000 per annum and payable from either the:

  • first April after you leave your course
  • April four years after the course started

If you’re a Scottish or Northern Irish student who took out a Postgraduate Tuition Fee Loan or Postgraduate Living Cost Loan (Scotland only) you’ll repay these under Plan 1.

How does this affect me as a self-employed person?

If you complete and return your 2018/19 Self Assessment form to HMRC by 31st October 2019, HMRC will calculate how much you need to pay for student loan repayments, as well as the usual tax and National Insurance contributions. You can get your accountant to perform these calculations for you if you prefer (see below) and include these on your self assessment return for submission to HMRC by the deadline of 31st January 2020.

Your tax liability must be paid to HMRC by 31st January following the end of the tax year. HMRC will pass the details of your student loan repayment amount to the Student Loan Company, who will update your loan account accordingly.

What if I didn’t get my Self Assessment in before 31st October?

If you fail to return the your self assessment to HMRC by the 31st October, you (or your accountant) will need to manually calculate the repayment amount. Every student loan holder is required to pay back 9% of their annual gross income that falls above the threshold.

To manually work out how much you need to pay, you need to:

  • Calculate your annual gross income by adding together your gross salary, gross dividends, and any other earnings
  • Subtract the threshold that applies to you (either £18,330 or £25,000 from Plans 1 or 2 highlighted above) from your annual gross income to find out how much over the threshold you are
  • Calculate your annual student loan repayment which will be 9% of the above total.

The figure you end up with is your annual payment and must be sent to HMRC before 31st January to avoid any fines or penalties for late submission of your annual self assessment return and late payment of tax due.

Some examples:

Example 1

Joe took his loan out in Scotland, so he is affected by Plan 1. In the 2018/19 tax year, he has a gross salary of £16,000, with dividends of £12,000 and other earnings of £2,000. To find his annual loan repayment amount, he would:

  • Add these amounts together, (making £30,000)
  • Subtract the Plan 1 threshold of £18,330 for the 2018/19 tax year (leaving £11,670)
  • Calculate 9% of £11,670, giving him the annual loan repayment mount of £1,050.30.
Example 2

Sarah took her loan out after 1st September 2012 in England, so she is affected by Plan 2. She has a gross salary of £16,000, with dividends of £12,000 and other earnings of £2,000. To find her annual loan repayment amount, she would:

  • Add these amounts together, (making £30,000)
  • Subtract the Plan 2 threshold of £25,000 (leaving £5000)
  • Calculate 9% of £5000, giving her the annual loan repayment amount of £450.

Early repayments

There’s no penalty for paying some or all of your loan early.

If you’ve nearly paid off your loan

You can avoid overpaying if you know your loan will be paid off within the next two years. State on your tax return that your loan will be paid off in the next two years. Send your online tax return to HMRC before 1st November to avoid overpaying.

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Written by Tom West

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