How to repay a student loan when self-employed

The debt of a student loan can be a frustration of working life, and when you’re self-employed, working out your payments can mean added stress. This article will look at how to repay your student loan if you are self-employed, by covering the following points:

• What payment plan you are on
• When to start repaying the student loan
• How to make repayments
• What to do if you miss the tax deadline

As a self-employed person, the short answer to ‘how to repay a student loan’ is that HMRC will calculate the total you pay back. HMRC will do this once you complete your Self Assessment, just like how they calculate your tax and National Insurance total and you pay in one go. But there are a few things you need to understand first before filling out your Self Assessment.

There are different student loan plans. You will have been automatically enrolled on one when you finished your course. These can differ by country and the year you started the course. There are four plans from the government – take a look at the criteria below to find out which applies to you:

• Plan 1: Students who take out a loan in Northern Ireland will be on Plan 1. So will students who took out a loan in Scotland before September 1998. If you took an undergraduate loan out in England or Wales, before 1st September 2012, you will also be on Plan 1.

• Plan 2: This plan applies to students who began studying in England and Wales after September 2012, and has a slightly higher payment threshold – this means you won’t start paying the loan back until you meet a higher salary bar.

• Postgraduate loan: If you studied a postgraduate course, you will likely have this type of payment plan. The rules can differ in all territories of the UK so always check on the appropriate government site. (This is technically Plan 3, but isn’t called as such).

• Plan 4: As of April 2021, students in Scotland who were previously on Plan 1 have been moved to the new Plan 4. It operates exactly the same as Plan 1 but with a slightly higher payment threshold – meaning you won’t have to pay until you earn more, which we will get onto next.

You don’t start repaying your student loan until the April after you finish your course, if you are earning over the threshold. Once you start earning over the threshold for your plan, your repayments will kick in. 

Each year in April the thresholds change, so always keep an eye on these on the gov.uk website if you are self-employed, to understand when you are due to start paying. Here are the details of each threshold for the plans, as of April 2021.

The threshold is £19,895 annual salary, which breaks down to £1,657 a month or £382 per week before tax. The threshold on this plan is lower because people on Plan 1 have generally borrowed less than students on Plan 2, because of the dates they studied and the lower tuition fees or grants available at the time. This also means they will have gathered less interest on their loan.

The Student Loan repayment threshold for Plan 2 is £27,295 per year. This would be an income of £2,274 a month or £524 a week before tax. 

If you’re on Plan 4, your Student Loan repayment threshold is £25,000 a year, which would be £2,083 a month or £480 a week before tax.

In every plan you don’t have to start paying until you earn more than the threshold total and then you will pay 9% of the difference back to the loan company. 

For example, if you are on Plan 4 and earn £30,000 (£5,000 above the threshold), you would pay 9% of £5,000, which is £450 for the year.

Making payments to your loan when you are self-employed is slightly different than if you were an employee at another business.

If you are self-employed through a limited company, then you can pay your student loan through your wages, just like your tax and National Insurance contributions, through the regular PAYE salary system.

If you are self-employed and complete your own assessment to pay your taxes, fill in your student loan details when doing your tax return. 

HMRC will then calculate the total you owe for your student loan at the same time as your tax calculation. You will then pay this back later, exactly like you do with your tax bill. An accountant will also be able to determine how much you’ll pay when helping with your tax return.

If you miss the deadline for your self-assessment forms to be submitted, you will have to calculate how much your student loan repayment will be. Here are the steps to making that calculation:

• Take your annual earnings before tax. 
• Identify which plan you belong to.
• Determine the plan’s threshold and how much more you earn over the threshold.
• Divide that number by 100, then multiply by 9. This is how much you owe to the loan company.

For example, let’s say you are on Plan 2, for which the payment threshold is £27,295. If your income is £32,000 annually, that means you make £4,705 over the threshold. Divide this by 100 (to get £47.05) and multiply by 9, and that leaves you with £423.45. This is how much you’ll pay back to the loan company in that year.

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