Knowledge bank

This guide by Rebecca Benneyworth highlights the key aspects to be aware of when dealing with student loans in self-assessment returns.

Introduction

One tricky aspect which is becoming more common in self-assessment is dealing with student loans. Most loans for those now coming into the workforce are dealt with through the income contingent repayment scheme, and many former students are making their repayments through their pay packet, as are most employees. However, there are a number of situations where student loans crop up on self-assessment returns.

Self-employed

When an individual is self-employed, they will be liable to make repayments through the self-assessment system. The basic rules are fairly simple. There are no repayments due if the annual income is no more than £15,000 in a tax year, but payments are then due at a rate of 9% on the excess. For self-employed students the income taken into account is the total income, including any investment income.

An individual is liable to make repayments from the April after his/her course finished, so those liable to make their first payments on the 2009 tax return will be graduates from July 2007. Those who graduated in July 2008 which is the first year for which students were required to borrow their tuition fees, bringing an average annual loan to around £6,000, will be liable to make repayments on the 2010 tax return. You must make sure that the relevant box on page 2 of the tax return is ticked to ensure that student loan repayments are included in the total tax calculated.

More than one employment

When students make repayments through their salary, the limit is applied on a pay period (monthly or weekly) basis rather than an annual basis, similar to NI contributions. Another similarity with NI is that the nil rate band of £15,000 applies to each employment to keep things simple for employers. The amounts that are deducted when an individual has two jobs are therefore correspondingly lower than if the individual had one job paying the total of the two salaries.

However, if for some reason this individual comes within self assessment, the correct student loan must be calculated, allowing only a single £15,000 annual limit, and normally resulting in additional payments falling due – in fact a maximum of £1,350 may have been underpaid as a result.

Investment income

Individuals who have made repayments through their salary but have other income which brings them within self-assessment (such as investment income of more than £2,000 in a year) will be liable to 9% repayments on the total income for the tax year less the limit of £15,000. Payments may therefore be due on the additional income, and as a result of applying a pay interval threshold when earnings have fluctuated through the year.

Payments on account

The law characterises student loan repayments as tax liabilities, so calculation of payments on account, and particularly applications to reduce payments on account must take into account the student loan liabilities in addition to tax and NIC payable on self employed earnings.

Worth knowing

• The current rate of interest is 0% (from 1 September 2009 to 31 August 2010)
• From December 2009, those within the last twenty-three months of repaying their loan can opt out of payment through salary and choose payment by direct debit to prevent them from overpaying due to the slow communication inherent in the repayment system. The Student Loan Repayment company (which operates separately from the Student Loan Company) will contact affected individuals to notify them of this option. It will normally be beneficial to take this option, unless the individual is expecting a significant income cut.

Information provided in this guide is correct as at January 2010.

Credit

This article is republished with kind permission of www.AccountingWEB.co.uk, the UK's leading online community for accountants.
www.accountingweb.co.uk/topic/tax/student-loans-and-self-assessment/396987

Rebecca Benneyworth

Rebecca Benneyworth is tax editor of AccountingWEB.co.uk

First published: a-n.co.uk February 2010