There are two different ways that student loans repayments are calculated. The two schemes are called Plan 1 and Plan 2. The differences between the schemes can be confusing for some employees so understanding how they work is vital for payroll.
They are both paid back in the same ways, if you are paid via PAYE your employer will take repayment deductions directly from your salary.
If you pay the majority of your tax by self-assessment then your student loan deductions will be calculated alongside your tax and paid by 31st January each year.
You can also chose to make voluntary repayments directly with the student loan company.
- Student Loan Plan 1 is for people in England and Wales who took out their loan before 1st September 2012.
- On Plan 1 you will start to repay the loan from the April following the date you graduate or leave your course.
- You will pay 9% of anything you earn over £18,330 before tax per year.
- This amount is changed every April.
- The current interest rate for Plan 1 loans is 1.5%.
- Student Loan Plan 2 is for people in England and Wales who took out their loan out after 1st September 2012.
- On Plan 2 you will start to repay the loan from the April following the date you graduate or leave your course, or the April four years after the course started if you’re studying part time.
- The earnings threshold is £25,000 and you pay 9% of your income over the threshold.
- The interest rate for plan 2 loans are based on RPI. Currently its RPI plus 3% while studying. From 6 April after leaving your course until the loan is repaid in full it’s a variable rate dependent upon income. RPI (3.1%) where income is £25,000 or less, rising on a sliding scale up to RPI plus 3% (6.1%) where income is £45,000 or more.
If you have repaid too much of your loan and have a credit balance this can be reclaimed from the loan company. You will get interest on this for a maximum of 60 days.
If you or your employees have any queries around student loans, we will be happy to help answer them!