How Do I Pay Back A Student Loan When I’m Self-Employed?

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One of the unpleasant things in college life is student loan repayment. This is a daunting debt, yet it is even more frightening if you are self-employed. If you are a contractor, freelancer, or small business owner, then you have to include student loan repayments on your annual Self Assessment tax return.

Are you getting confused about how you are going to manage your repayments? Well, there is no need to worry. Here, we are going to provide you with everything that you need to know when it comes to student loan repayment most especially if you are self-employed.

How Much Should I Need To Earn Before I Start Repayment?

If you obtained your loan in Wales or England prior to September 1, 2012, then your loan will have to be repaid under HMRC’s Plan 1. You will begin your student loan repayment on the month of April right after you are done with your course. On April 6, 2020, which is the start for the 2020/21 tax year, you will start your loan repayment if your income is more than £372.88 per week or equivalent to £1,615.83 per month, prior to tax and any other deductions. This salary will amount to £19,390 per year.

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If you are a Welsh or English student who began your undergraduate course on or after September 1, 2012, then you will fall under HMRC’s Plan 2. The earliest that you will start repaying is when your earnings reach to more than £511.05 per week or £2,214.58 per month prior to tax and any other deductions. This salary will be equivalent to £26,575 per year.

We can summarise these figures below to help you identify when you are going to begin your Student Loan repayment.

For the 2020/21 tax year, Plan 1 for Student Loan Repayment salary will be:

Weekly  = £372.88

Monthly  = £1,615.83

Per Year = £19,390

For the 2020/21 tax year, Plan 2 for Student Loan Repayment salary will be:

Weekly  = £511.05

Monthly  = £2,214.58

Per Year = £26,575

For the 2019/20 tax year, Plan 1 for Student Loan Repayment salary will be:

Weekly  = £364.13

Monthly  = £1,577.91

Per Year = £18,935

For the 2019/20 tax year, Plan 2 for Student Loan Repayment salary will be:

Weekly  = £494.71

Monthly  = £2,143.75

Per Year = £25,725

Take note that these amounts are all prior to tax and any other deductions.

How And When Do I Repay My Student Loan?

Repayments are done automatically using the tax system and it will end as soon as you have paid off the entire amount of your student loan. This is applicable whether you are self-employed or directly employed.

Full-Time Courses

If you are taking full-time courses, then you will start repaying in the month of April right after you have finished or left your course. However, this is only applicable if you are earning more than the repayment threshold. For instance, if you have graduated in June 2019, then it is expected that you will start your repayment in April 2020. Repayments can only be done if you are already earning enough.

Part-Time Courses

For those who are taking part-time courses, repayment will start on the month of April, just four years after you have started your course, or it will be the month of April right after you have finished or left your course, whichever comes first. Nevertheless, this can only be possible if you are earning more than the repayment threshold.

For those students who have obtained their loans in Scotland or Northern Ireland, they can only be influenced by Plan 1.

What About A Postgraduate Doctoral Loan Or Postgraduate Master’s Loan?

If you are a Welsh or an English student and you obtained a Postgraduate Doctoral Loan or a Postgraduate Master’s Loan, then you will fall under the Postgraduate Loan repayment plan.

If you obtain a Master’s loan, then the quickest way that you can begin repaying your loan is when your earnings are more than £404 per week which is equal to £1,750 per month. Take note that this is prior to tax and any other deductions. This salary is equivalent to £21,000 per year and it will be payable starting on the first April after you have left your course.

In case you obtained a Doctoral loan, the most immediate that you begin repaying is when your earnings are more than £404 per week or £1,750 per month, prior to tax and any other deductions. In a year, your salary would amount to £21,000. Your loan will be payable either on the first month of April just after you finished your course or on the month of April four years after the course began.

For the Postgraduate Doctoral Loan or Postgraduate Master’s Loan Repayment, the salary requirement for 2019/2020 prior to tax and any other deductions are the following:

Weekly = £403.84
Monthly = £1,750
Per Year = £21,000

For those Scottish or Northern Irish students who obtained their Postgraduate Living Cost Loan (For Scotland only) and Postgraduate Tuition Fee Loan, you will begin repaying your loan when your income will reach £18,330 per year.

What Is Its Effect On Me Being A Self-Employed Person?

If you were able to complete and submit your 2019/20 Self Assessment form to HMRC on October 31, 2020, then HMRC will compute the amount that you have to pay for your student loan repayments along with your regular tax and National Insurance contributions.

You could also ask your accountant to do the computations for you if you want and include these amounts on your Self Assessment return which you will submit to HMRC on its due date which is January 31, 2021.

Take note that you must pay your tax liability to HMRC every January 31st after the tax year ends. HMRC will submit the amount and other details of your student loan repayment to the Student Loan Company, then, afterwards, your loan account will be updated accordingly.

What If I Didn’t Get My Self Assessment In Before 31st October?

In case you failed to submit your Self Assessment to HMRC on October 31st, then you or your accountant will have to compute the repayment amount so you can include this on your Self Assessment return.

If you are a student loan holder then you are obligated to pay back 9% of your annual gross income provided that it falls over the threshold.

In order to know the amount that you have to pay, you must do the following:

  • Compute your annual gross income by adding everything including your total salary, total dividends, as well as any other type of earnings.
  • Deduct the threshold that is applicable to you, this could either be £19,390 from Plan 1 or £26,575 from Plan 2 as what we have mentioned above. This amount will be subtracted from your annual gross income so you will know how much is over the threshold for you.
  • Compute your student loan repayment for the relevant year which is equivalent to 9% of the amount that is left.

The balance will now become your annual payment. You have to submit your annual Self Assessment as well as your student loan repayment along with your payment for all your tax liabilities to HMRC on January 31st so you can avoid any fines or penalties.

Some Worked Examples Of Repayments

Example 1

Joe obtained his loan in Scotland, hence, he will be more appropriate for Plan 1. In the tax year of 2018/2019, his gross salary was £16,000. He was able to earn dividends of £12,000 along with other earnings amounting to £2,000. The following are the things that he needs to do so he will know the amount of his annual loan repayment:

First of all, all his earnings will be added together, so £12,000 + £16,000 + £2,000, the total will be  £30,000.

By deducting the threshold for Plan 1 which is £18,935, the remaining amount will be £11,065 for the tax year 2018-2019.

The next thing to do is to compute 9% of £11,065, which is equivalent to £995.85. Hence, this will be his annual loan repayment.

Example 2

Sarah obtained her loan in England after September 1, 2012. hence Plan 2 will be more appropriate for her. Her gross salary is £16,000, along with other earnings of £2,000 and dividends of £12,000. In order to find out the amount for her annual loan repayment, here are the things that she needs to do:

First, she had to add all her earnings, so by adding £16,000, £2,000, and £12,000, she will get a total of £30,000.

The next thing is to deduct the Plan 2 threshold of £25,725, hence, the remaining amount will be £4,275.

By computing 9% of £4,275, the result will be £384.75.

Early Repayments

By paying some or all of your loans earlier, you won’t be charged with any fines or penalties.

If you’ve nearly paid off your loan

You can avoid overpayments if you are aware that your loan will be paid off within two years.

On your Self Assessment tax return, you have to state that your loan will be paid off within two years. Submit your tax return online to HMRC before November 1st so you can avoid any overpayments.

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