A matter of degrees
20 August 2018
This article was featured in the September 2018 issue of the magazine.
Neil Tonks ChMCIPPdip, legislation manager at MHR, discloses details of the approaching implementation of postgraduate student loan deductions through the payroll
One of the changes coming along in the next financial year is the processing of repayment of postgraduate loans via payroll. These loans have been available since the 2016–17 academic year for English-domiciled postgraduate students taking masters courses anywhere in the UK, and for eligible EU-domiciled students taking masters courses in England.
The first cohort of students who were eligible for the loans have now finished their courses, and therefore repayment of the loans needs to begin.
In payroll terms, postgraduate loans have much in common with the existing student loans which are available to undergraduates. However, there are some important differences, chief amongst which is that HM Revenue & Customs (HMRC) view them as a separate deduction. They’re not just a third ‘plan type’ added to the existing arrangements.
The deduction is based on payments subject to National Insurance contributions (NICs), as is the case with student loans, but postgraduate loans have a different threshold (£21,000) and repayment rate (6%). Like student loans, the deduction will always be a whole-pounds value.
The threshold is interesting. It was included in the original government consultation on postgraduate loans in 2015 and set at £21,000 (frozen until 2021) because that was in line with the arrangements for plan type 2 student loans at that time. Since then, of course, the plan type 2 threshold has been raised to £25,000; so, it will be interesting to see whether the government will bring the postgraduate loan threshold into line, as it was their original intention that repayment of the two should be aligned.
The major complication from a payroll perspective is that a postgraduate loan can be active at the same time as a student loan of either plan type. Some employees will therefore be paying both a 9% student loan repayment and a 6% postgraduate loan repayment. This means that some middle-earning employees will find themselves paying 40% tax, 2% NICs, 9% student loan and 6% postgraduate loan, plus a minimum pension contribution (from next April) of 4% after tax relief-at-source.
...a postgraduate loan can be active at the same time as a student loan of either plan type
Employers will be notified of the need to start and stop postgraduate loan deductions via two new notices, called ‘PGL1’ and ‘PGL2’, respectively. These will be delivered via the same route as the existing SL1 and SL2 notices. The first PGL1 notices will be issued in February or March 2019, to be effective from the start of the 2019/20 tax year.
HMRC are revising the starter checklist to allow new employees to self-declare a liability to repay a postgraduate loan, in the same way they can currently declare liability to student loan repayments.
As an aside, it would be nice if at the same time, they allowed employees to self-declare as a Scottish (or Welsh) taxpayer to put an end to the current nonsense of new starters without a form P45 initially having to go on a ‘rest of UK’ tax code even when both employer and employee know they’re liable to Scottish tax. As far as we’re aware there are no plans for this, but you never know, we may be surprised.
Consideration is being given to changing the P45 form to allow the postgraduate loan to be indicated. Again, it’s to be hoped that if this is done, the existing ‘Y’ which indicates liability to student loan deductions is changed to a ‘1’ or ‘2’ to indicate the plan type, removing another current nonsense where employees with a P45 form indicating liability to student loan repayments have to be asked which plan type applies because the information on the form is inadequate.
HMRC have said they’d prefer the postgraduate loan deduction to be shown separately on the payslip from any student loan. Although not an absolute requirement, we expect payroll systems will do this anyway since adding the deductions together into a single value would be illogical.
The amounts deducted will be reported via new fields in the full payment submission return and, in due course, the earlier year update. The amount will be paid over to HMRC in the regular monthly payment, so if your payroll system has a ‘payment over’ report or screen, that will also change to include postgraduate loans.
Finally, the P60 certificate for the 2019–20 tax year will be changed to show postgraduate loans in addition to student loans.
So, another tax for employers to collect and pay over. The good news is that, especially if you receive notifications from HMRC electronically, most of it will ‘just happen’ in your software and the only real impact on you will be tweaks to the new starter process to deal with a new checklist and maybe a new form P45.