The basics of student loan deductions
01 February 2019
This article was featured in the February 2019 issue of the magazine.
Jill Smith MCIPPdip, CIPP policy manager, explains the rules
This article aims to provide an understanding of the basic guidelines of the employer’s duties when they have an employee for whom a student loan deduction (SLD) is to be made from their pay.
Employers have been involved in collecting repayments on behalf of the Student Loan Company (SLC) since 2000, with HM Revenue & Customs (HMRC) being the contact for information and to where the amounts deducted from employees’ earnings are paid. In addition to repayments deducted from earnings through the payroll, there are also two other ways that repayments may be collected: by HMRC through self-assessment, or direct through the SLC.
Employers are not responsible for identifying employees who should be making student loan repayments. When a student completes or leaves a course, the SLC passes details to HMRC which checks its systems to trace the borrower.
The employer is responsible for making SLDs from an employee’s earnings, keeping records of the deductions made and other relative documents, paying the deductions over to HMRC and providing details of the deductions within each full payment submission (FPS).
The SLD should also be recorded as a separate item, clearly labelled on the employee’s pay statement (payslip) as a deduction from pay.
Notification to start a SLD
There are several ways an employer can be notified to begin making SLDs:
Start notice (SL1) – If an employer receives a start notice from HMRC SLDs should commence from the first available payday after the date specified in the notice. The notice will state whether the loan is ‘plan 1’ or ‘plan 2’ or, from April 2019, a post-graduate loan (PGL).
Form P45 – If an employer receives a form P45 for a new employee which shows a ‘Y’ in the student loan indicator box, student loan deductions are to apply from the next available payday. The employer should not deduct any loan arrears if the P45 is received after the first payday.
As the P45 form does not indicate whether the student loan is plan 1 or plan 2, the employee must provide the employer with this information so that the correct earnings threshold can be applied. If the employee does not tell the employer which type of loan it is, the employer must treat it as plan 1 unless and until HMRC sends a SL1 notice.
Starter checklist – Employers can use HMRC’s starter checklist, which requires new starters to answer questions about having a student loan, whether it is plan 1 or plan 2, when their studies ended and whether they are repaying the loan directly to the SLC (revised from April 2019).
Student loans are calculated on an employee’s earnings for National Insurance contributions (NICs) purposes. When an employer sets up a SLD for an employee, it must specify which plan they are on and repayments will be deducted based on the plan applicable.
Plan 1 – The current threshold for 2018–19 is £18,330, which will rise to £18,935 from April 2019, with earnings above this threshold subject to SLD calculated at 9%.
Plan 2 – The current threshold for 2018–19 is £25,000, which will rise to £25,725 from April 2019, with earnings above this threshold subject to SLD calculated at 9%.
PGL – The threshold for 2019–20 is £21,000, with earnings above this threshold subject to SLD calculated at 9%.
HMRC can check an employer’s FPS returns and identify that SLDs are not being made for an employee when it expects them to be. HMRC may then send an electronic generic notification service (GNS) message to prompt the employer to check and make the correct deductions for future pay periods. Two prompts may be sent, followed by a telephone call.
It is important to note that the GNS employer prompt is not an instruction to begin making deductions, nor is it a SL1 notice. Also, HMRC cannot tell whether the employer has a valid reason for not making the deductions (such as there being a council tax attachment of earnings order in place).
On receiving a GNS prompt, the employer should attempt to locate and then act on the SL1 notice (if appropriate). If the SL1 cannot be found, the employer should contact HMRC and ask for another one. Alternatively, the employer could ask the employee to complete the relevant parts of a starter checklist to obtain authorisation to begin making deductions.
Notification to stop a SLD
Stop notice (SL2) – An employer receiving a SL2 notice from HMRC must stop making deductions from the first available payday after the deduction stop date shown in the notice. The ‘first available payday’ is the first payday on which it’s practical to apply that notice.
Note that an employer must never stop making SLDs if asked to do so by the employee. The employee must contact the SLC if they have a query about deductions being made.
Leavers – When an employee with a student loan deduction leaves the employment, an indicator ‘Y’ must be recorded in the P45 form in box 5. However, a ‘Y’ is not required if SL2 notice has been received.
Care should be taken that even if deductions have not been made from an employee – because, for example, earnings were either consistently below the threshold or because an attachment of earnings order prevented a deduction being made – the indicator ‘Y’ must still be recorded in the form P45.
If the SL2 has not been received from HMRC, where NICs are due on a payment after leaving, loan deductions would also apply on those NICable earnings.
The employer must also supply details of employee’s deductions in their payslip and P60 certificate and in the P45 form if an employee leaves the business.
Death of an employee – If an employee with a student loan dies, deductions are not made from any final payment due. This is because class 1 NICs are not due on any payment made after the death of the employee.
Because SLDs are calculated on NICable earnings deductions are not made from occupational pension payments as they are not subject to NICs. Therefore, if a P45 form or starter checklist is received for a person on a pensions payroll indicating that a SLD should be made, it can be ignored. However, if the person is also an employee, deductions should be calculated on their employment earnings.
Although devolved policies are increasing the complexity of payroll processes in many areas – with legislation concerning student loans and their repayment issued separately for England and Wales, for Scotland, and Northern Ireland – the fundamental rules governing SLDs through the payroll are aligned so there are no differences in this respect across the UK.
However, as individuals with loans from one UK nation may move to another, any employer could be required to deal with loans from any one of the four nations. Only England and Wales have both plan 1 and 2 loans, with Scotland and Northern Ireland having only plan 1 loans. In Scotland, the plan 1 threshold will differ from the rest of the UK from 2021 as it is planned to rise to £25,000.
PGLs have been introduced in England and Wales only for postgraduate study so will not apply to individuals with loan in Scotland and Northern Ireland.