With all the goings on that have been happening on the political landscape recently (cheese and wine anyone?!), you would be forgiven for not having heard or taken stock of the fact that from April 2022, university leavers with a plan 2 student loan will, on average, be paying around £110 more per year than they would have done. Not ideal in the current cost of living crisis. In this blog, we take a look at why this is, and also how student loan repayments work when you are self employed/director of your own limited company, and you may only be taking a small salary, if at all, with the rest as drawings or dividends.
Why are loan repayments going up?
Usually, each year, the government raises the student loan repayment threshold by 4.6%, based on average earning growth. However, this year, they are freezing the thresholds for plan 2 loans at the 21/22 levels.
Regardless of whether your employed, self employed, or a director of your own limited company, everyone has to repay their student loan when their total income exceeds their relevant threshold.
Plan 1 Loan
You will have a Plan 1 loan if a) you live in England/Wales and took your loan out before 1st September 2012 or b) took out your loan at any time in Scotland/Northern Ireland. Plan 1 loans are not affected by the threshold freeze.
The threshold for Plan 1 loans for 21/22 is £19,895, rising to £20,195 in April 2022 for the 22/23 tax year.
Plan 2 Loan
You will have a Plan 2 loan if you took out your loan (excluding Postgraduate Loans) in England/Wales on or after 1st September 2012.
The threshold for Plan 2 loans for 21/22 is £27,295, which is where it will remain for 22/23. This was due to increase to £28,550 from April 2022, meaning that university leavers on plan 2 will have to make repayments on an additional amount of £1,255 (equating to just over £110).
What will I have to pay?
For both Plan 1 and Plan 2 loans, you will be required to repay 9% of your total income that exceeds your relevant threshold.
So how do student loan repayments work if I’m a company director or self employed?
For most people in permanent, PAYE employment, who have no other personal income, student loan repayments will be deducted from monthly pay and paid to HMRC by your employer. HMRC then passes these payments over to the student loans company.
However, if you are self employed, it is likely that you will not be receiving a salary. Therefore, when your self assessment return for the period is calculated, you will need to declare that you have a student loan. The 9% deduction will then be calculated on your total income that exceeds your relevant threshold and will be payable to HMRC in additional to your self assessment tax liability for the year.
If you are a company director, it is likely that, for tax planning purposes, you will be withdrawing a small salary (under the student loan repayment threshold) and then withdrawing dividends from the company. Therefore, even though your salary will be below the threshold, your dividends will need to be taken into account, so, just like self employed workers, you will also need to declare this on your self assessment return for the year and the deduction will be made based on your total income (including dividends) for the period.
It is also worth bearing in mind that even if you aren’t a company director or self employed, and are permanently employed, if you receive personal income from any other source (such as rental income, or dividends from other companies), the you will also need to make additional student loan repayments based on this additional income when you prepare your self assessment return.
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