Student Loan Deductions
Student loan repayments are often collected through payroll. A deduction is made from the employee’s pay and paid to HMRC as part of the employer’s PAYE payments. The amount of the deduction is determined by the employee’s level of earnings and the ‘Plan Type’ of the student loan in place. Payroll Manager is able to make the necessary calculations and deductions automatically.
Plan types, thresholds and calculations
Student loan and postgraduate loan deductions are dependent on employees pay, and are taken as a percentage of the employee’s earnings above a certain threshold. The threshold is determined by the ‘Plan type’ of the particular loan. The various plan types are as follows:
- Student Loan Plan Type 01 : Applies to all students that lived in Scotland or Northern Ireland when they started their course, and also to those that lived in England or Wales and started their course before September 2012. Deductions are calculated at 9% of earnings above the threshold. The annual threshold for Plan 1 loans for 2021-22 is £19,895 .
- Student Loan Plan Type 02: Applies to students that lived in England or Wales and who started their course after September 2012. Deductions are calculated at 9% of earnings above the threshold. The annual threshold for Plan 2 loans for 2021-22 is £27,295 .
- Student Loan Plan Type 04 : Applies to Scottish borrowers only and is effective from 6 April 2021. Deductions are calculated at 9% of earnings above the threshold. The annual threshold for Plan 4 loans for 2021-22 is £25,000 . More details about this new Scottish plan type can be found towards the end of this guide.
- Postgraduate Loan (PGL): These are a relatively new type of loan and were introduced in April 2019. Deductions are calculated at 6% of earnings above the threshold. The annual threshold for Postgraduate loans for 2020-21 is £21,000 (and will remain at £21,000 in 2021-22) .
For tax year 2021-22: A monthly paid employee earning £3000.00 month with a Plan 2 student loan in operation from April 2021 onward:
- Annual threshold for plan type 2 loan is £27,295.00 – the monthly threshold is £27295/12 = £2274.58
- Monthly earnings above threshold is £3000.00 – £2274.58 = £725.42
- Deduction is 9% of earnings above the threshold. 9% of 725.42 (rounded down to nearest pound) = £65.00
Starting Student Loan deductions for NEW employees
When taking on a new employee you should ask them to complete a new employee form on which they can declare which plan type student loan they have (if any). This form can be produced by clicking ‘Forms‘ from the main menu in Payroll Manager and then ‘Blank New Employee Form‘. (If the employee provides a P45 on joining then this will also confirm that they were making Student Loan Repayments via their previous employer, but does not tell you which plan type to use).
Note: HMRC guidance states “If your employee doesn’t know which plan type they’re on, ask them to contact the Student Loan Company. If they’re still unable to confirm their plan type, start making deductions using Plan type 1 until you receive further instructions from HMRC”
– When adding a new employee to the payroll (after clicking ‘Employees’ then ‘Add New Employee’ in Payroll Manager) you are taken through a number of input screens, one of which contains the ‘Starter Declaration’ where you can record the ‘Start Date’ and ‘Student Loan Plan Type’.
– After entering these details (providing that you already have pay entered for this employee), Payroll Manager will calculate the relevant student loan deduction amounts automatically, and display them in the ‘Deductions’ section of the ‘Pay Details’ screen.
Student loan repayments appear in the ‘Deductions’ section of the employee’s payslip:
Note: If you forgot to add details of the student loan plan type when first adding the employee to the payroll or have made a mistake when doing so then please follow the instructions below.
Starting (or editing) Student Loan deductions for existing employees
You may receive instructions from HMRC to start making student loan deductions from an existing employee either via form SL1 ‘Start Notice’ (which will tell you which plan type is applicable) or via a ‘Generic Notification Service student loan reminder’ message (in which case you should ask the employee which plan type you should use).
Note: HMRC guidance states “If your employee doesn’t know which plan type they’re on, ask them to contact the Student Loan Company. If they’re still unable to confirm their plan type, start making deductions using Plan type 1 until you receive further instructions from HMRC.”
To start making the appropriate deductions follow the instructions below:
– Go to the ‘Pay Details‘ screen in Payroll Manager, click on the ‘Deductions‘ tab and select the appropriate employee.
– Click on the ‘blue spanner‘ symbol at the top of the ‘Student Loan Repayments‘ column (or the ‘Postgrad Loan Repayments‘ column for postgraduate loans) and enter a ‘Start date‘ in the relevant box. HMRC ask that you ‘start making deductions from the next available pay day‘ so the date that you enter should be that employee’s next pay date. IMPORTANT: Do not enter a date earlier than this, even if the notice specifies an earlier date, as doing so may affect previous pay periods.
– Leave the ‘End date’ box empty. This should only be used when you wish to stop the calculation of student loan deductions. Click ‘OK‘
Payroll Manager will calculate and display the relevant student loan deductions on the ‘Pay Details’ screen and on the employee’s payslip.
Stopping student loan deductions
If you receive form SL2 ‘Stop Notice’ from HMRC then you should enter an ‘End Date’ into the Student Loan Repayment box in Payroll Manager (on the same screen as you entered the ‘Start Date’). Payroll Manager will stop calculating deductions from that point onwards.
Paying Student Loan Deductions to HMRC
Student Loan Deductions are reported to HMRC via RTI FPS returns. The deducted amounts are then paid to HMRC together with the PAYE Tax due for that period. Student Loan Deduction amounts are summarised on the ‘Pay‘ – ‘Employers Summary for Tax Period‘ report.
Scottish student loan plan type 04 – from 6 April 2021
From 6 April 2021 the student loan earnings threshold in Scotland rises to £25,000. To facilitate this a new Scottish student loan type is to be introduced named Plan type 04. This plan type will apply to all new and existing Scottish borrowers from 6 April 2021. Current borrowers with existing plan type 01 loans will be moved to plan type 04 loans, and employers will be notified of any such moves via HMRC current SL1 notification process. It will be posible to select the new plan type 04 in Moneysoft Payroll Manager in payroll data files from 2021-22 onwards (i.e you can not assign plan type 04 to employees in a payroll data file for 2020-21). You may receive advance notice from HMRC to change the plan type for an employee from April 2021 onward. If this is the case then you should make a note enter the new details once you have created your data file for 2021-22, which the software will allow you to do towards the end of March 2021.
How to enter a plan type 04 student loan
- Select the appropriate employee on the ‘Pay Details‘ screen
- Click on the ‘Deductions‘ tab, then click on the ‘Setup‘ (blue spanner) button at the top of the ‘Student Loan‘ column
- Enter the ‘Start date‘ into the ‘Type 4‘ section of the screen, as per the start date indicated by HMRC.
- If the employee already has a student loan type 1 in operation (as per the example below), then you should also enter an ‘End date‘ for the type 1 loan.
- Leave the ‘End date‘ for the type 4 loan blank and click ‘OK‘
An employee has not yet earned above the annual threshold but the software is still calculating deductions – why? – The annual threshold is divided by the number of pay periods in a year in order to determine the monthly or weekly threshold. If an employee earns above the calculated monthly or weekly threshold then they will be liable for student loan deductions in that particular pay period, regardless of their pay in other periods.