LITRG outlines a new facility for employed student loan borrowers to opt out of repaying through PAYE in favour of a direct debit as they get close to full repayment.
Student Loans and the PAYE Process
The income-contingent student loans scheme was introduced from the autumn of 1998. Borrowers normally start making repayments from 6 April after they have completed or left their course as long as their annual income is £15,000 or more.
Employed borrowers have student loan repayments deducted directly from their pay under Pay As You Earn (‘PAYE’). The borrower makes a declaration – usually by completing form P46 – when they start a job that they are liable for student loan repayments and the employer deducts them accordingly. These deductions are paid to HMRC, then on to the Student Loans Company (‘SLC’). HMRC can also issue ‘start’ and ‘stop’ notices to the employer to instruct them to commence or cease student loan deductions as necessary.
Student loan borrowers who fall under the old ‘mortgage-style’ regime in place up to 1998 are not affected by these changes as their loan repayments are not collected by employers via PAYE.
Why has an Opt-Out been Introduced?
Problems were found to arise as employed borrowers were approaching full repayment of their loan, resulting in their paying too much and having to claim a refund from the SLC. This is because PAYE deductions are calculated at 9% of pay above £15,000 and, generally, the student’s account is not updated with repayments made until after the end of each tax year, when the employers file end-of-year returns. Although HMRC have improved the speed at which information is passed to the SLC, there is inevitably a delay in updating the borrower’s records. Deductions from pay can therefore continue even after the loan has been repaid in full.
A direct debit facility will therefore allow the borrower to opt out of PAYE deductions up to two years prior to anticipated full repayment.
Potential Issues
The smooth running of this new system will depend upon everyone getting the paperwork right – borrowers themselves, employers, the SLC and HMRC.
For instance, where a borrower has switched to direct debit repayments and moves jobs, they must take care when completing a form P46 if one is required so that they do not pay twice – by both direct debit and through PAYE. For ongoing employments, the SLC must inform HMRC once a direct debit is in place to trigger the issue of a ‘stop’ notice to the employer so that there are no further deductions from pay.
The SLC is intending to monitor accounts with a view to identifying borrowers who are getting close to full repayment and contacting them to offer the switch to direct debit. This is all very well where the borrower’s income is relatively stable, but where there are fluctuations it could be difficult to determine. And whilst most repayment information is now passed from HMRC to SLC relatively speedily after the tax year end, there will always be some cases where the student finds their loan balance has not been updated. In these situations, the borrower can contact the SLC and, on production of evidence such as P60 and payslips, may be able to agree to move to direct debit on the basis they feel they are approaching full repayment, even though the SLC has not invited them to do so.
The basic position is that if for any reason a direct debit fails, the borrower will go back into PAYE repayment.
Borrowers can find out more on the Student Loan Repayment website.
Further General Guidance on Student Loans
The above information is for employed borrowers, but student loan repayments can also be collected via the Self Assessment (‘SA’) system – for example, where the borrower is self-employed.
Borrowers can find more information at our website - Tax Help Students and HMRC publish two guides:
- CSL1 – Collection of student loans for SA borrowers
and - CSL2 – A guide for employers and employees to help answer common student loan queries
Useful links
Information from HM Revenue & Customs about the new direct debit facility - New Initiative to Reduce Student Loan Over-Repayments for PAYE Borrower
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