Plan 2 loans: How do Pay As You Earn (PAYE) student loan repayments work?
If you are employed at the beginning of the tax year in which you are due to start making repayments, the Student Loans Company (SLC) should notify HM Revenue & Customs (HMRC). HMRC in turn issue a ‘start notice’ to your employer who will then calculate student loan deductions along with your tax and National Insurance contributions (NIC) and pay them to HMRC through the PAYE system.
But when you start a job, as part of their new starter checklist (previously known as Form P46), your employer should ask you whether you have a student loan on which you are due to start making repayments. Your employer will also ask what type of loan you have, it is important that you provide the correct information as this will affect what loan repayments you make. We provide an annotated example of a starter checklist to help explain how you should answer the questions so that the correct loan repayments are made.
The exact process depends on timing – let us look at a couple of examples.
Example 1 – Robert, new starter employee
Robert left university in the summer of 2019 and got a job straight away. He had no P45 so his employer asked for information to complete the new starter checklist.
Although Robert has a Plan 2 income-contingent student loan, he didn’t leave his course before last 6 April, so his employer was not required to start deducting loan repayments even if Robert was earning over the repayment threshold.
But from April 2020 HMRC should issue a ‘start notice’ to his employer and if Robert is earning more than the threshold, loan deductions will begin.
Example 2 – Zara
Zara, who also has a Plan 2 income-contingent student loan, leaves university at the same time as Robert, in the summer of 2019 but cannot find work straight away.
She finds a job at last in May 2020 and her employer requests information to complete a new starter checklist. Unlike Robert, because she left her course before 6 April 2020, if Zara's income is high enough, her employer will have to start making deductions from her pay immediately.