How are repayments calculated?
Plan 1 student loan repayments are due at a rate of 9% on your earnings over the repayment threshold (this is £18,935 a year for 2019/20, which works out to £1,577.91 a month or £364.13 a week).
Each pay day is looked at separately. Your repayments may vary according to how much you are paid in any particular week or month. If your income falls below the starting limit for that week or month, your employer should not make a deduction.
In summary, your employer has to calculate and deduct repayments each pay day and you can only get a refund based on your annual earnings if either you have to complete a Self Assessment tax return or if your income for the tax year is less than the repayment threshold of £18,935 in which case you can apply to the Student Loans Company (SLC) for a refund.
Jack is paid monthly. His employer has received the HMRC 'start notice' to begin deducting Plan 1 student loan repayments from 6 April 2019 if his income goes over the threshold – £18,935 a year works out to £1,577 a month.
Jack's basic salary is £16,000 a year, or £1,333 a month, but the summer months are busy and he has to work overtime. In July he earns an extra £350 and notices that a deduction has been made from his pay for student loan repayments. He asks how this was calculated and why he has to pay for it.
His employer explains that his total pay in July was £1,683, which is £106 more than the £1,577 a month threshold for loan repayments. This £106 is multiplied by 9% to give a student loan deduction of £9.54.
So, as you can see from the example above, student loan deductions are calculated on a ‘per pay period’ basis. This is how National Insurance contributions (NIC) are worked out. In most cases this is week by week or month by month according to how frequently you are paid.
This means that in the example above, Jack’s employer cannot take account of any ‘spare allowance’ up to the £18,935 a year limit in calculating the July deduction, and cannot refund it in a later month when Jack’s wages fall back below the starting point.
If Jack was in the Self Assessment system, he might, however, obtain a refund when his final loan deductions are worked out according to the total income on his tax return.