Self Assessment & Tax Returns

Students Loans If You Are Self-Employed

With the cost of education continuing to rise, student loans have become an increasingly popular way of borrowing money to cover the costs. Whilst these are often for small set amounts and do feature lower-than-average interest rates, they are of course required to be repaid once you begin earning over a particular level of salary.

With more and more people becoming self-employed, there has obviously been an increase in the number of these people with student loans. If you are a freelancer, contractor or small business owner, you must include your student loan repayments on your yearly Self-Assessment tax return. We have put together the following information to help you better understand what you need to do to pay back student loans if you are self-employed.

When must I begin repaying my student loan?

Where you took out your loan and when will have an influence on when you will be required to being repaying your student loan. HMRC have 2-main repayment plans regarding student loans.

Plan 1 – If you took out a student loan in England or Wales before 1st September 2012 you will be required to begin repayments once you start earning more than £1,527 per month before tax and other deductions. This works out as an annual salary of £18,330.

Plan 2 – If you took out a student loan in England or Wales on or after 1st September 2012, you will need to start your student-loan repayments once you begin earning £2,083 a month before any deduction – this is an annual salary of £25,000.

*If you took out a student loan in Scotland or Northern Ireland only Plan 1 is applicable to you.

Postgraduate loans

If you took out a Postgraduate Master’s Loan or a Postgraduate Doctoral Loan in England or Wales, you will be placed on a Postgraduate Loan repayment plan. This means that you will be required to begin your loan repayments once you begin earning more than £1,750 a month before tax and other deductions – this is £21,000 per annum.

What must I do if I am self-employed?

First, you need to have completed and returned your annual Self-Assessment form to HMRC before the 31st October deadline. HMRC will then use this information to calculate how much you will be required to repay each month. If you wish to know what this will be beforehand, you can have an accountant make the necessary calculations. Any tax liability you owe must be paid to HMRC by the 31st January of the following tax year. HMRC will then pass your student loan repayment details to the Student Loans Company so that they can update your loan account details.

Missing the Self-Assessment deadline

If you miss the Self-Assessment deadline of 31st October, you will be required to calculate your repayments yourself – you are of course advised to seek the assistance of an accountant if this occurs and you feel ill-equipped to do so alone. As a rule, everybody who takes out a student loan is required to pay back 9% of their annual gross income that falls above the designated threshold. To calculate what this will be, you will have to do the following:

• Add your gross salary and any other earning, such as dividends to come up with your annual gross income
• Subtract the student loan threshold (£18,330 or £ 25,000 from the plans highlighted above) from your annual gross income. This remaining figure is how much over the threshold you are.
• Your student loan repayment will 9% of this figure

The figure you end up with will represent your annual student loan repayment. You must ensure this information is given to HMRC before the 31st January deadline to avoid any fines and penalties.

To help you get a better understanding of the calculations involved and how much you can be expecting to repay, we have put together the following examples:

Example A.

You took out a loan in England before 2012. This means you will need to follow Plan 1. For the 2018/19 tax year, your gross salary was £16,000, with dividends of £12,000 and other income totalling £2,000. To calculate how much you will have to repay each year, you do the following:

Add £16,000 + £12,000 + £2,000 = £30,000. Then subtract the Plan 1 threshold of £18,330 from the £30,000. This leaves £11,670. You then calculate 9% of this – which is £1,050.30. This is the amount you will be required to repay in total for your student loan in one year.

Example B.

You took out your loan in Wales after 2012. You are therefore required to follow Plan 2. If again, your gross salary as £16,000, you had additional dividends of £12,000 and other earnings of £2,000, your total would again be £30,000. To find your annual student loan repayment, you would subtract the Plan 2 threshold of £25,000 from your £30,000 total – leaving a total of £5,000. You would then calculate what 9% of £5,000 is = £450. This means you will be required to repay £450 in student loan repayments that year.

Additional factors to note

If you wish to repay your student loan back early, you can, there are no penalties or financial punishments to doing so. Likewise, if you know your student loan is going to be fully repaid in the next 2 years, you are advised to let HMRC know this on your tax return as this will enable you to avoid overpaying tax.