I`m a contractor: What about my student loan?

This article is for information purposes only and should not be seen as financial advice. You should always consult with your accountant for any tax advice.

It’s easy to forget about your student loan. Typically, it will not show on your credit history and it usually has little bearing on your ability to get a mortgage. But if you were a student, it’s not uncommon to have around £20,000 of debt floating around in the system – which increases even more if you started University after 2012.

When working as an employee of a company, you don’t need to give any thought to your student loan payments, as they are automatically deducted from your payslip.

However, when working as a limited company contractor, the responsibility lies with you to ensure that you are making the necessary payments. Read on for an overview on whether you need to make student loan payments and how to calculate how much you should be paying.

I’m a contractor, do I need to make student loan payments?

If you have ever been an employee, your student loan repayments would have been automatically deducted from your payslip, assuming that you were earning more than the minimum earning threshold. In this instance, HMRC would deduct 9% of what you earned over the threshold (6% for a postgraduate loan). You can check your current balance, including how much you have repaid, and interest added, here.

In contrast, when working as a limited company contractor or sole trader, repayments should be made as one lump sum as part of your annual Self-Assessment tax return. In most cases, this will be 9% of what you earn over the threshold.

Making student loan payments as a contractor

The first thing that you will need to check is if you are earning above the threshold amount, as this will determine if you are required to make payments or not. The threshold depends on which plan you are on, the amounts are currently set as follows:

• Plan 1: £19,895
• Plan 2: £27,295
• Plan 4: £25,000

Once you’ve checked this and on the basis that you are meeting the minimum amount for your plan, you will need to complete the Student Loan repayment section of your annual self-assessment tax return and return by the annual deadline in January.

If you’ve recently made the switch to a limited company contractor or sole trader, you may also need to check any payments you have already made, which can be viewed on your annual student loan statement.  Your previous payslips would also show how much was paid to the Student Loans Company (SLC).

Calculating student loan payments when self-employed

To calculate how much you are required to pay, you or your accountant will need to do the following:

• Calculate your annual gross income, this includes your gross salary and any other earnings. Bear in mind that as a limited company contractor, your annual gross income would include your salary, dividends, and any other income you may have (such as rental income).
• Once you have this total amount, you then would subtract the threshold that applies to your plan, to see how much over the threshold you are.
• Your student loan repayment for the year will then be 9% of this remaining amount.
• Once you have calculated and submitted your payment as part of your annual self-assessment, HMRC will pass your details over to the SLC, who will credit your loan accordingly.

It’s important to remember that even if you pay yourself using a more tax-efficient low salary, your higher dividends will be considered for your student loan calculation.

Voluntary student loan payments

If you have some extra cash, you can choose to make additional repayments to SLC, reducing the amount you owe, which can help to shorten the length of your loan and cut down the amount of interest that you are charged. You can make extra payments by signing in to your online account.

There’s no penalty if you make extra payments, but they are non-refundable. If you decide to make any additional payments, they will be treated as extra to the calculated amount that you pay HMRC through your self-assessment.

Remember that your student loan will be scrapped after a certain number of years – you can check the length of your student loan here. So, if you don’t think you will come close to paying the loan off before your deadline date, you’d probably be better off not making any voluntary repayments.

As always, you should consult with your accountant for any financial advice.

Contractor insurance from Kingsbridge

While Kingsbridge can’t help you with your student loan repayments, we can help you with your insurance, making you a more desirable hire – so you can get those voluntary payments paid off quicker. Our package policy includes everything you need: professional indemnity, public liability, occupational personal accident cover, employers’ liability and directors’ and officers’ liability.

Get a quote today here, or give our friendly team a call on 01242 808 740.