Ask the Expert: How do I get UK Student Loan payments right? Ask the Expert: How do I get UK Student Loan payments right?

Ask the Expert: How do I get UK Student Loan payments right?
28 Aug 2018

Q. When new starters bring a P45 that includes a Student Loan indicator, we set them up as a Plan 1 as we are supposed to. Sometimes they will say we are taking too much money and their threshold should be higher, but we always respond that we need to wait for Her Majesty’s Revenue & Customs (HMRC) to tell us otherwise. This state of affairs causes new starters a lot of distress that I am keen to avoid if possible. How can I ensure they are on the right Student Loan Plan from their first payday?

This is an issue faced by many employers, but the problem is only likely to get bigger following the introduction of Post Graduate Loans (PGL) collection from payroll as of April 2019.

As you say, you are doing exactly the right thing: HMRC’s guidance indicates that if their status is unknown, ex-students should be placed on the Plan 1 threshold, which is currently £18,330 (US$23,559) per annum or £1,527.50 (US$1,962.70) per month and £352.50 (US$452.93) per week. 

But this means that former students with a Plan 2 Loan start repaying it earlier, even though their threshold is £25,000 (US$32,130) or £2,083.33 (US$2,677.51) per month and £480.76 (US$617.88) per week. But let’s explore the issue in more depth to help clarify the situation:

The problem

The sole reason for this discrepancy is that the P45 post-employment certificate is unfit for purpose with regards to placing former students on the right Plan type. The P45 only indicates that Student Loan deductions were made during an individual’s last employment. It does not specify whether it was a Plan 1 or 2 Under-Graduate (UGL) Loan. As of April 2019, it will also fail to specify whether a PGL deduction should be made. 

P45s were not changed in 2016 when Plan 2 UGLs became repayable through payroll and is unlikely to be amended in 2019 when PGLs also became repayable through payroll. One reason that HMRC is bound to give for this situation is that there is no space on the A4-sized form. But the second reason they are likely to offer is actually the solution to the problem.

The answer 

The best solution is to simply ask former students which Plan it is they actually have. There are three ways in which employers are authorised to start a Student Loan deduction but only one way to get it right before paying them for the first time: 

Method

How

Comment

1

The P45

A new employee’s P45 indicates that a Student Loan is in place but not what Loan type they have, so you must default to Plan 1. This means that, while the P45 is good for advising tax codes as well as pay and tax details, it is not effective in a Student Loan situation.

2

The SL1 from HMRC

An SL1 will be sent by HMRC after an employee starts work. If they have been categorised as Plan 1 when they should be Plan 2, the SL1 acts as a change notice to switch them from Plan 1 to Plan 2. But it does nothing to resolve the situation of an incorrect Plan being applied in the first place.

3

The Starter Checklist

Employers should use the Starter Checklist if their new employee does not provide them with a P45. This form should also be used to gather information about every new employee’s Student Loan type.

 

So in summary, the answer to your question is, give the Starter Checklist to every new employee – or at the very least ask them:

  • ‘Do you have a Student Loan to repay?’ and, if the answer is yes, ask
  • ‘What type of Student Loan do you have’?

Of course, they may not know their Plan type. If this is the case, point them in the direction of the ‘Your Plan Type’ section of the Student Loans Company (SLC) website. Here they will be asked in which UK country their home address was at the time they applied for their Loan (former European Union students should indicate their country of study). Depending on their answer, further questions could follow, but the SLC website will clarify the Plan type based on each individual’s answers.

My advice

Giving the Starter Checklist to all new employees means they have yet another form to complete on joining the company. From your point of view, it also means that another form has to be handed out and chased if not completed.

As a result, it would seem simpler to just transcribe the Starter Checklist questions about Student Loan type onto a form you know they will complete – that is the one asking them for details about the bank into which they would like their salary to be paid! 

A word of caution though – Starter Checklist questions will change following the introduction of new PGLs in 2019. In this case, you have the option to either wait for the revised Starter Checklist, which will hopefully make its debut in early 2019, or make a note to revisit the bank detail form once the new questions are known.

 Ian Holloway

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services. He was involved in processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by developing course material, newsletters and face-to-face presentations.

OTHER ARTICLES THAT MAY INTEREST YOU

UK pension freedoms: What employers need to know

Plan 1 or Plan 2: How do we get Student Loan repayments right?

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Q. When new starters bring a P45 that includes a Student Loan indicator, we set them up as a Plan 1 as we are supposed to. Sometimes they will say we are taking too much money and their threshold should be higher, but we always respond that we need to wait for Her Majesty’s Revenue & Customs (HMRC) to tell us otherwise. This state of affairs causes new starters a lot of distress that I am keen to avoid if possible. How can I ensure they are on the right Student Loan Plan from their first payday?

This is an issue faced by many employers, but the problem is only likely to get bigger following the introduction of Post Graduate Loans (PGL) collection from payroll as of April 2019.

As you say, you are doing exactly the right thing: HMRC’s guidance indicates that if their status is unknown, ex-students should be placed on the Plan 1 threshold, which is currently £18,330 (US$23,559) per annum or £1,527.50 (US$1,962.70) per month and £352.50 (US$452.93) per week. 

But this means that former students with a Plan 2 Loan start repaying it earlier, even though their threshold is £25,000 (US$32,130) or £2,083.33 (US$2,677.51) per month and £480.76 (US$617.88) per week. But let’s explore the issue in more depth to help clarify the situation:

The problem

The sole reason for this discrepancy is that the P45 post-employment certificate is unfit for purpose with regards to placing former students on the right Plan type. The P45 only indicates that Student Loan deductions were made during an individual’s last employment. It does not specify whether it was a Plan 1 or 2 Under-Graduate (UGL) Loan. As of April 2019, it will also fail to specify whether a PGL deduction should be made. 

P45s were not changed in 2016 when Plan 2 UGLs became repayable through payroll and is unlikely to be amended in 2019 when PGLs also became repayable through payroll. One reason that HMRC is bound to give for this situation is that there is no space on the A4-sized form. But the second reason they are likely to offer is actually the solution to the problem.

The answer 

The best solution is to simply ask former students which Plan it is they actually have. There are three ways in which employers are authorised to start a Student Loan deduction but only one way to get it right before paying them for the first time: 

Method

How

Comment

1

The P45

A new employee’s P45 indicates that a Student Loan is in place but not what Loan type they have, so you must default to Plan 1. This means that, while the P45 is good for advising tax codes as well as pay and tax details, it is not effective in a Student Loan situation.

2

The SL1 from HMRC

An SL1 will be sent by HMRC after an employee starts work. If they have been categorised as Plan 1 when they should be Plan 2, the SL1 acts as a change notice to switch them from Plan 1 to Plan 2. But it does nothing to resolve the situation of an incorrect Plan being applied in the first place.

3

The Starter Checklist

Employers should use the Starter Checklist if their new employee does not provide them with a P45. This form should also be used to gather information about every new employee’s Student Loan type.

 

So in summary, the answer to your question is, give the Starter Checklist to every new employee – or at the very least ask them:

  • ‘Do you have a Student Loan to repay?’ and, if the answer is yes, ask
  • ‘What type of Student Loan do you have’?

Of course, they may not know their Plan type. If this is the case, point them in the direction of the ‘Your Plan Type’ section of the Student Loans Company (SLC) website. Here they will be asked in which UK country their home address was at the time they applied for their Loan (former European Union students should indicate their country of study). Depending on their answer, further questions could follow, but the SLC website will clarify the Plan type based on each individual’s answers.

My advice

Giving the Starter Checklist to all new employees means they have yet another form to complete on joining the company. From your point of view, it also means that another form has to be handed out and chased if not completed.

As a result, it would seem simpler to just transcribe the Starter Checklist questions about Student Loan type onto a form you know they will complete – that is the one asking them for details about the bank into which they would like their salary to be paid! 

A word of caution though – Starter Checklist questions will change following the introduction of new PGLs in 2019. In this case, you have the option to either wait for the revised Starter Checklist, which will hopefully make its debut in early 2019, or make a note to revisit the bank detail form once the new questions are known.

 Ian Holloway

Ian Holloway is head of legislation and compliance at Cintra HR and Payroll Services. He was involved in processing payrolls large and small from organisations across all sectors until 2011 when he started helping to educate the profession by developing course material, newsletters and face-to-face presentations.

OTHER ARTICLES THAT MAY INTEREST YOU

UK pension freedoms: What employers need to know

Plan 1 or Plan 2: How do we get Student Loan repayments right?

Irish Revenue to change employer PAYE reporting