Contractor Doctor: How do I calculate student loan payments on a contracting income?

Dear Contractor Doctor

I’ve just returned to IT contracting via my own limited company after taking a three year career break to complete a university degree.

Despite amassing some savings from my contracting before the course, I still needed to take out a student loan to help pay for my final year’s tuition fees and living expenses.

How do I calculate my student loan repayments based on a contracting income?

Thanks,

Anne

Contractor Doctor says:

“The general principle of student loans is that an individual starts making repayments as soon as their gross annual income exceeds £15,795,” explains James Abbott, tax partner at contractor Accountant Abbott Moore.

For Umbrella contractors, the threshold is straightforward and based on the contractor’s salary. For limited company contractors, the low salary, dividends and any other income, such as rental income, are added together to create a gross total.

“Contractors then make payments worth 9% of what they earn above the threshold,” continues Abbott. “Payments are made either as part of their Pay As You Earn (PAYE) income tax payments for Umbrella company contractors or, for limited company contractors, when they submit a self-assessment tax return.”

How student loans are repaid by umbrella contractors

According to Abbott, HMRC finds out about former student borrowers from the Student Loans Company (SLC): “HMRC and SLC compare income data and, once a contractor is eligible to start making repayments, the SLC alerts HMRC.”

For non-contractor employees, HMRC normally writes to the borrower’s employer and tells them to add a “Y” marker to that employee’s payroll record so that deductions are made at source via PAYE. The employee’s salary is then paid net of income tax, National Insurance Contributions (NICs) and student loan repayments.

This is also how it works with umbrella company contractors, who have have the same marker placed on their payroll records to indicate that they are making student loan repayments.

Repayment by limited company contractors

Employers only have to make the deductions when told to by HMRC, which may result in limited company contractors slipping through the net. Abbott notes that limited company contractors are of course still employees, but of their own companies.

“Student loan repayment liabilities for a limited company contractor are processed via the contractor’s self-assessment personal tax return, with the contractor ticking the appropriate box on the return,” says Abbott. “The low salary and high dividends are added together to give a contractor’s gross income on which the student loan repayment is calculated.”

Abbott provides an example:

“In practice, the vast majority of contractors ask their accountant to prepare the calculation as part of their tax return,” adds Abbott.

Contractors should be proactive with student loan repayments

Abbott warns contractors with outstanding student loan liabilities not to be complacent: “The above example demonstrates that a contractor on an average level of fee income would have monthly student loan liabilities of around £250. Ideally, contractors should plan for these repayments and set aside cash each month to cover the payments in the same way as they should save to cover their income tax bill.”

Abbott concludes: “If HMRC does not write to them, or their accountant does not flag student loans when the contractor joins, they should be proactive and ask their accountant to calculate their likely liability so a proportion of net income can be set aside each month.”