Plan 1 or plan 2: How do we get student loan repayments right? Plan 1 or plan 2: How do we get student loan repayments right?

Plan 1 or plan 2: How do we get student loan repayments right?
14 Dec 2017

Q. We have had a couple of instances lately where a new employee, who used to be a student, has given us their P45 on joining the company. We put them on Plan 1, only for them to complain that we were deducting too much money from them and they should be subject to the Plan 2 threshold instead. Have you experienced this situation too and what is the best solution?

Rest assured, this is a common scenario and highlights the deficiency of the P45 with regards to carrying over a student loan from one employer to another. The P45 has only one ‘marker’ on it to say that a student loan was in operation during the individual’s previous employment.

But because new employers do not know and cannot make an assumption about the Plan type the individual concerned was on, they generally apply the default Plan 1. In fiscal year 2017/18, the annual repayment threshold for Plan 1 stands at £17,775 (US$23,214) and will rise to £18,330 (US$23,939) in 2018/19.

Understandably, a former student with a Plan 2 Loan tends to be upset if a lower threshold has been applied, however - the correct Plan 2 repayment threshold is £21,000 (US$27,425), which is quite a difference. At this current time, Her Majesty’s Revenue & Customs (HMRC) seems neither willing nor able to change the P45 format. I am also unaware of any plans to change things during 2018/19 when payroll software will be required to report Plan types to HMRC using the Full Payment Submission (FPS) system. As a result, employers have two options - either:

1. Carry on as now and absorb the pain of the employee who is on the wrong Plan type.
HMRC will correct this scenario via a SL1 notice as soon as possible, although it does not get around the fact that the individual concerned might have repaid some of their loan when they did not need to. They will be able to get this overpayment back but not until the end of the tax year; or
2. Adopt a workaround.

A possible workaround

Simply put, you could ask the starting employee which student loan type they have. As their P45 does not provide this information, you should request it yourself. Possibilities include providing the new staff member with a starter checklist when you accept their P45 or asking separate student loan questions such as:

• Do you have a student loan that is not fully repaid?
o If the answer is NO, there are no further questions
o If YES:

• Are you repaying your student loan directly to the Student Loans Company via agreed monthly payments?
o If YES, there are no further questions
o If NO:

• What type of student loan do you have:
o Plan 1?
o Plan 2?

• Did you finish your studies before 6 April last year?
o If the answer is YES, start deductions for the Plan type indicated
o If the answer is NO, repayments will commence at the start of the following tax year and HMRC will advise you of the correct Plan when you are due to start paying deductions.

In summary, it makes sense to be proactive and ask your new employee for more information on seeing that the P45 marker has been checked. Moreover, this issue should be addressed sooner rather than later as the situation will only get worse during 2018/19 when the Plan 2 threshold increases from £21,000 to £25,000 (US$32,658).

This means staff members are likely to get even more upset if they find themselves paying back their loan on earning £18,330 rather than £25,000 as the gulf between the two is such a wide one.

“It makes sense to be proactive and ask your
new employee for more information on seeing that
the P45 marker has been checked.”

 

Ian Holloway, head of legislation and compliance, Cintra HR and Payroll Services, investigates P45 issues when new employees carry over student loans from one employer to another.

Q. We have had a couple of instances lately where a new employee, who used to be a student, has given us their P45 on joining the company. We put them on Plan 1, only for them to complain that we were deducting too much money from them and they should be subject to the Plan 2 threshold instead. Have you experienced this situation too and what is the best solution?

Rest assured, this is a common scenario and highlights the deficiency of the P45 with regards to carrying over a student loan from one employer to another. The P45 has only one ‘marker’ on it to say that a student loan was in operation during the individual’s previous employment.

But because new employers do not know and cannot make an assumption about the Plan type the individual concerned was on, they generally apply the default Plan 1. In fiscal year 2017/18, the annual repayment threshold for Plan 1 stands at £17,775 (US$23,214) and will rise to £18,330 (US$23,939) in 2018/19.

Understandably, a former student with a Plan 2 Loan tends to be upset if a lower threshold has been applied, however - the correct Plan 2 repayment threshold is £21,000 (US$27,425), which is quite a difference. At this current time, Her Majesty’s Revenue & Customs (HMRC) seems neither willing nor able to change the P45 format. I am also unaware of any plans to change things during 2018/19 when payroll software will be required to report Plan types to HMRC using the Full Payment Submission (FPS) system. As a result, employers have two options - either:

1. Carry on as now and absorb the pain of the employee who is on the wrong Plan type.
HMRC will correct this scenario via a SL1 notice as soon as possible, although it does not get around the fact that the individual concerned might have repaid some of their loan when they did not need to. They will be able to get this overpayment back but not until the end of the tax year; or
2. Adopt a workaround.

A possible workaround

Simply put, you could ask the starting employee which student loan type they have. As their P45 does not provide this information, you should request it yourself. Possibilities include providing the new staff member with a starter checklist when you accept their P45 or asking separate student loan questions such as:

• Do you have a student loan that is not fully repaid?
o If the answer is NO, there are no further questions
o If YES:

• Are you repaying your student loan directly to the Student Loans Company via agreed monthly payments?
o If YES, there are no further questions
o If NO:

• What type of student loan do you have:
o Plan 1?
o Plan 2?

• Did you finish your studies before 6 April last year?
o If the answer is YES, start deductions for the Plan type indicated
o If the answer is NO, repayments will commence at the start of the following tax year and HMRC will advise you of the correct Plan when you are due to start paying deductions.

In summary, it makes sense to be proactive and ask your new employee for more information on seeing that the P45 marker has been checked. Moreover, this issue should be addressed sooner rather than later as the situation will only get worse during 2018/19 when the Plan 2 threshold increases from £21,000 to £25,000 (US$32,658).

This means staff members are likely to get even more upset if they find themselves paying back their loan on earning £18,330 rather than £25,000 as the gulf between the two is such a wide one.

“It makes sense to be proactive and ask your
new employee for more information on seeing that
the P45 marker has been checked.”

 

Ian Holloway, head of legislation and compliance, Cintra HR and Payroll Services, investigates P45 issues when new employees carry over student loans from one employer to another.

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