IR35 Status and Student Loan Calculations: Inside vs Outside Determination
Contracting in the UK offers flexibility and often higher earnings, but it creates a maze of complexity when it comes to student loan repayments. If you work through a limited company, an umbrella company, or under the Construction Industry Scheme (CIS), your student loan deductions work completely differently from standard employment. And with IR35 rules changing how many contractors operate, understanding these differences isn't optional.
The confusion stems from how contractor income is classified and taxed. Are you employed or self-employed? Are you inside or outside IR35? Do you get paid gross or net? Each answer triggers different student loan repayment mechanisms, and getting it wrong can mean either underpaying (and facing surprise bills later) or overpaying (and losing money you don't owe).
For contractors with student loans, the structure you choose for your work genuinely affects how much you pay and when. This isn't about tax avoidance. It's about understanding how the system treats different working arrangements so you can make informed decisions and avoid expensive mistakes.
IR35 legislation determines whether a contractor should be treated as employed or self-employed for tax purposes. The rules examine the reality of your working relationship, not just what your contract says. If HMRC or your client determines you're "inside IR35", you're treated like an employee for tax purposes even though you're technically a contractor.
If you're inside IR35, you're taxed as if you're employed. That means PAYE tax, National Insurance, and crucially for this discussion, automatic student loan deductions. If you're outside IR35, you're genuinely self-employed. You pay corporation tax on company profits and can extract money as dividends, which have very different student loan implications.
Since April 2021, medium and large private sector clients (and all public sector clients since 2017) became responsible for determining IR35 status. This shifted the risk away from contractors but also meant many were pushed inside IR35 to avoid liability. For contractors, this meant moving from dividend-based income with no automatic student loan deductions to PAYE income with immediate deductions.
When you're deemed inside IR35, your income is treated as employment income. If you work through an umbrella company (the most common structure for inside IR35 contractors), student loan deductions happen automatically through PAYE.
The student loan calculation uses standard PAYE thresholds. For Plan 2, that's 9% on income above £27,295 annually (£2,274.58 monthly). So if your umbrella company pays you £3,500 monthly as deemed employment income:
This happens automatically every time you're paid. The umbrella company has your tax code (which includes SL or PGL markers) and makes the deduction alongside other PAYE obligations.
The benefit of this approach is simplicity. You don't need to track student loan obligations separately or file Self Assessment for the contracting income. It's handled automatically. The downside is immediate visibility. Every month, you see over £100 disappearing from your pay for student loans, which can feel substantial when you're earning variable amounts.
Umbrella companies exist specifically to handle employment obligations for contractors inside IR35. You become an employee of the umbrella company, which then contracts your services to the end client. From a student loan perspective, umbrella companies are straightforward because they operate standard PAYE.
However, several factors make umbrella calculations more complex than typical employment:
The umbrella company deducts their margin (typically £15-£30 per week) before calculating your taxable pay. This slightly reduces your student loan deductions because it reduces gross income. On a £500 weekly contract with a £25 margin, you're taxed on £475, not £500.
Some umbrella companies accrue holiday pay rather than paying it out weekly. This affects timing. Your student loan is calculated on what you're actually paid each period, not what's accruing in a holiday pot.
Legitimate business expenses can be offset against your deemed employment income, reducing what you're taxed on and what student loan deductions apply to. However, since April 2016 "travel and subsistence" relief was removed for most umbrella workers, so the scope for expense claims is very limited.
If you work multiple assignments through the same umbrella company, they're all aggregated into one employment. Your threshold applies once to the combined income. But if you work through multiple umbrella companies simultaneously, each might apply the threshold separately, potentially leading to overpayments that need reconciliation.
Contractors operating outside IR35 typically run limited companies. They invoice clients directly, their company receives payment, and they extract profit through a combination of salary and dividends. This structure has very different student loan implications.
Here's the critical point: dividends do not have student loan deductions taken at source.When you pay yourself £2,000 in dividends, no automatic student loan deduction happens. The money arrives in your personal account in full.
However, this doesn't mean you avoid student loan repayments. Dividend income counts as total income for Self Assessment purposes. If your total income (salary plus dividends) exceeds your student loan threshold, you owe repayments through Self Assessment.
James runs a limited company outside IR35. He pays himself:
Through PAYE on his salary: £0 student loan deduction
Through Self Assessment on total income: (£47,570 - £27,295) × 9% = £1,824.75 owed in January
James has received all his income throughout the year without any student loan deductions. But come January, he owes £1,825 (rounded) through Self Assessment. This requires planning and budgeting because the money isn't automatically set aside.
Many contractors outside IR35 are caught off-guard by this. They receive full dividend payments all year and forget that 9% of everything above the threshold needs to be paid eventually. Our student loan calculator can help you model this and plan your cash flow accordingly.
The Construction Industry Scheme operates completely differently from both standard employment and typical self-employment. Under CIS, contractors in the construction industry have 20% or 30% deducted from their payments at source by the contractor paying them (the "mainstream contractor").
These deductions cover tax and National Insurance, not student loans specifically. Student loan repayments under CIS work through Self Assessment, not through the CIS deduction itself.
You submit an invoice for £5,000 of work. As a registered CIS subcontractor:
That £1,000 deducted is credited toward your tax and National Insurance bill when you complete Self Assessment. Your student loan repayment is calculated separately based on your total income, then added to your Self Assessment bill.
If your total CIS income for the year is £40,000:
This £1,143.45 gets added to your Self Assessment calculation alongside tax and NI.
The key difference from umbrella companies is timing. CIS subcontractors receive 70-80% of their gross invoice immediately, with student loans paid in a lump sum through Self Assessment months later. Umbrella workers have all deductions taken immediately and receive a smaller percentage of the gross contract value upfront.
Understanding what you actually take home is crucial for decision-making. Let's compare the same £60,000 annual contract under different structures:
These calculations show CIS comes out ahead in this scenario, followed by limited company, then umbrella. However, the rankings change based on contract value, expenses, and personal circumstances. The important point is that student loan repayments are similar across all three (around £2,800-£2,950), but the timing and method differ significantly.
Recent IR35 reforms fundamentally changed the contracting landscape. Before the private sector reforms in April 2021, many contractors operated outside IR35 through limited companies, extracting income as dividends with student loan obligations handled through Self Assessment.
After April 2021, medium and large private sector clients became responsible for IR35 status determination. Risk-averse, many blanket-assessed contractors as inside IR35. This forced contractors into umbrella structures with immediate PAYE deductions.
Some contractors prefer the new system because it removes the January shock. Others resent losing control over cash flow. Neither is objectively better, but the forced shift caught many unprepared.
Given the complexity, strategic planning becomes essential:
Accept that student loans will be deducted automatically. Factor this into your rate negotiations. When a client offers £450 per day, calculate your actual take-home after umbrella margin, PAYE tax, National Insurance, and student loans. Your net might be closer to £280 per day. Negotiate accordingly.
Budget for your Self Assessment student loan bill. When extracting dividends, set aside 9% of everything above your threshold in a separate savings account. Come January, you'll have the money ready. Don't assume you can pay it from next year's earnings.
Similar to limited company contractors, budget for Self Assessment. The 20% CIS deduction covers most tax and NI, but student loans are extra. Set aside approximately 9% of your income above threshold separately.
For all contractors: Use our Umbrella IR35 PAYE Student Loan Calculator to understand your take-home under umbrella structures, and our CIS Self-Employed Student Loan Calculator to model CIS scenarios.
Many contractors focus on tax implications of IR35 but overlook student loans. Inside IR35 means automatic deductions. Outside means Self Assessment with lump-sum payments. This isn't a minor detail when it affects £2,000+ annually.
Contractors outside IR35 or under CIS often spend all their income without setting aside student loan amounts. January arrives with a bill they can't pay, leading to payment plans, interest charges, and penalties.
Some contractors try to claim questionable expenses to reduce their student loan liability. HMRC increasingly scrutinizes contractor expenses. If expenses are disallowed, you'll owe backdated student loans plus interest and potentially penalties.
Using multiple umbrella companies can result in multiple threshold applications. You might underpay if neither umbrella captures your full income, or overpay if both apply the full threshold. Either way, you need Self Assessment to reconcile.
This is perhaps the biggest misconception. Yes, dividends have no automatic deduction. But they absolutely count toward student loan calculations in Self Assessment. You still pay, just later.
Contractors need meticulous records for student loan purposes:
This documentation is essential for completing Self Assessment accurately and defending your position if HMRC queries your calculations.
Contractor arrangements are complex enough without student loans added to the mix. Consider professional advice from an accountant if:
Accountant fees typically range from £600-£1,500 annually for contractors, but can save multiples of that through proper structuring and accurate compliance.
The contractor landscape continues evolving. Potential changes on the horizon include:
Staying informed is crucial. What works today might not be optimal tomorrow. But understanding the fundamental principles (PAYE deducts automatically, Self Assessment requires planning, different structures create different cash flows) will remain relevant regardless of specific policy changes.
Contracting offers excellent earning potential and flexibility, but demands much more engagement with how you're taxed and how student loans are collected. You can't just receive a payslip and assume everything is handled correctly.
Whether you work through an umbrella, run a limited company, or operate under CIS, understanding your student loan obligations in that structure is essential. The money you owe doesn't change based on structure, but when and how you pay it does. That timing difference has real financial implications for cash flow, budgeting, and long-term planning.
Take time to understand your specific situation, use calculators to model different scenarios, keep thorough records, and budget appropriately for liabilities that aren't automatically deducted. Contracting rewards those who engage with the details. Student loans are one more detail that demands your attention, but with proper understanding, you can manage them effectively without surprises or overpayments.
UK Education Policy Specialist
With over 15 years of experience in UK education policy and student finance, Dr. Sharma founded Student Loan Calculator UK to help students navigate the complex world of student loans.