Student Loans and Income Tax

Repayment of your student loan is usually automatic if you are working within the UK and earning more than £15,000 annually. The repayment will be deducted from your salary along with your tax and you will be notified of this by the Student Loans Company.

Your first repayment will occur at the beginning of the tax year following the end of your course. The rate of repayment will be 9% of any money you earn above the £15,000. If your salary is less than £15,000, you will not pay anything. The interest rate if lower than that charged by banks or building societies and it will be automatically calculated.

If you choose to pay off your loan more quickly, you may make additional voluntary payments directly to the Student Loans Company at any time. You will also need to make payments direct to the Student Loans Company if you are working abroad.

Self Employment, Student Loans and Income tax

If you’re self-employed, your repayments will be calculated after you submit your annual tax return.

It may be complicated to decide whether you should make accelerated payments on your student loan in order to clear the debt more quickly.

When making this decision, it’s important to realize that there’s no great advantage in paying the loan off early. If you lose your job or have other financial problems, payments will be waived until your income is again above the threshold.

There’s a tendency to think that slow payment means the accrual of interest, but in fact the interest is pegged only at the rate of inflation, so in real terms there will be no increase in the total due.

The other factor affecting the decision is that student loans, unlike other debts, are eventually written off. The exact life on the loan depends on the type of loan you have, but it will eventually be written off, most commonly either 25 or 35 years after you graduated. This means that there’s a definite financial advantage in paying off any other loans or mortgages you have which will inevitably have a higher interest rate.

Low Interest

Look at it this way: you’re lucky enough to have a substantial loan at very low interest: instead of paying, say £5,000 off the loan when you have some spare cash, you’d be better off putting it into an interest-bearing deposit account. The accrual of capital over a few years will almost certainly outstrip the growth in your total debt to the Student Loan Company, making eventual repayment less painful.

This is only an overview, and the actual details of your loan repayment will vary according to which type of loan you have. It’s easy to find calculators for student loan repayments online and work out exactly how much you owe and how much it’s costing you. Armed with that information you can make a better choice about how to handle loan repayments.

The one thing that is certain is that if you have an outstanding student loan and you’re earning more than £15,000 in the UK, HM Revenue and Customs will be there to take repayments out of your pay packet.