Preventing Student Loan Overpayments

How can you help your clients to avoid the common problem of overpaying their loans? The threshold for repayments to begin, and the write-off date, depends on whether the loan is classed as “Plan 1” or “Plan 2”.

Plan 1

  1. Loan is one which was taken out before 1 September 2012.
  2. Repayments are calculated as 9% of the total income above the threshold.
  3. Threshold is £17,775 (2017/18 figures).
  4. Loans are written off on the borrower’s 65th birthday where the loan was taken out in or before the 2005/6 academic year, or 25 years after they become eligible to repay.

Plan 2

  1. Loan is one taken out after1 September 2012.
  2. Repayments are calculated as 9% of the total income above the threshold.
  3. Threshold £21,000 (2017/18 figures).
  4. Loans are written off 30 years after the loan first becomes eligible for repayment.

Pro advice 1. The loan becomes eligible for repayment in the April after the course is completed - not when the income threshold is exceeded.
Pro advice 2. If your client changes employer in the year, be aware that the P60 will only show deductions from the employer that issued it - check the P45 or payslips to get the figures from the earlier employments.
Pro advice 3. Repayments are only due on unearned income if it exceeds £2,000. This is not an allowance, however, so for example if there is freelance income of £2,001, repayments are due on the full amount, not just the £1 excess.
Pro advice 4. Unearned income is only subject to student loan repayments if a tax return has been issued. For example, if your client has other income exceeding £2,000, but the tax is collected via PAYE, no repayments will be due from it. HMRC cannot issue a tax return solely for student loan purposes.

Unearned income is essentially investment income including property. If you have any kind of self-employment, we must complete tax returns.

Advise clients that they can move to a direct debit arrangement by contacting the loan company if their loan is nearing repayment - they can then stop paying via PAYE or self-assessment to avoid overpaying. If the tax return amount exceeds the actual balance, contact HMRC to revise the assessment.

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