Repaying Your Student Loan While Self-Employed

For self-employed graduates, student loan repayments work quite differently compared to those in traditional employment. While employees have repayments automatically deducted through PAYE, self-employed individuals handle their student loan obligations through the Self Assessment tax system.

Key Differences from PAYE

• Annual rather than monthly: Self-employed repayments are calculated annually through your tax return, rather than monthly from your payslip
• Lump sum payments: You typically make repayments once or twice a year rather than in smaller monthly amounts
• Self-calculation: You're responsible for correctly reporting your income and calculating the repayment amount
• Same thresholds apply: You still only repay when your income exceeds the threshold for your loan plan
• Same percentage rates: You still pay 9% of income above the threshold (6% for postgraduate loans)

The Annual Cycle

The self-employed student loan repayment cycle follows the tax year (April 6 to April 5):

1. You earn income throughout the tax year
2. After the tax year ends, you complete your Self Assessment tax return by January 31
3. HMRC calculates your student loan repayment based on your profits
4. You make the payment along with your income tax and National Insurance

This means there can be a significant delay between earning the income and making the corresponding student loan repayment, which requires careful financial planning.

When completing your Self Assessment tax return, there's a specific section dedicated to student loans. It's crucial to fill this out correctly to ensure your repayments are calculated accurately.

Student Loan Information on Your Tax Return

Your Self Assessment will ask you:

• Whether you have a student loan
• Which plan type(s) you're on (Plan 1, 2, 4, 5, or Postgraduate Loan)
• If you've already made any student loan repayments for the tax year (usually through PAYE if you also had employment)

What Income Is Counted?

For self-employed individuals, student loan repayments are calculated based on:

• Trading profits: Your business income after allowable expenses
• Other taxable income: Including property income, investments, etc.
• Total taxable income: All sources combined, minus the personal allowance

How HMRC Calculates Your Repayment

Once you submit your Self Assessment, HMRC will:

1. Determine your total taxable income from all sources
2. Subtract the annual repayment threshold for your loan plan
3. Calculate 9% (or 6% for postgraduate loans) of the amount above the threshold
4. Add this amount to your tax bill

Filling Out Your Tax Return Correctly

When completing your Self Assessment online:

• The "Student Loan Repayments" section is typically found in the "Tax Calculation" or "Finish" section
• Make sure you know which plan type you're on before completing this section
• If you're unsure about your plan type, check with the Student Loans Company
• If you have multiple plan types, you need to indicate all of them

One of the most confusing aspects of self-employed student loan repayments is how they interact with "Payment on Account" - a system where you pay your tax bill in advance installments.

What is Payment on Account?

Payment on Account is HMRC's system for collecting Self Assessment tax in advance. If your Self Assessment tax bill (including Class 4 National Insurance but excluding Capital Gains Tax) is over £1,000, you'll need to make payments on account for the following tax year.

How It Affects Student Loan Repayments

Student loan repayments are included in the Payment on Account calculation. This means:

• You'll pay 50% of your previous year's student loan repayment by January 31
• You'll pay another 50% by July 31
• Any remaining balance (or refund) is settled when you complete your next tax return

Payment Schedule Example

For a self-employed graduate with a Plan 2 loan who owes £1,200 in student loan repayments for the 2024/25 tax year:

1. January 31, 2026: Pay £1,200 (full amount for 2024/25) + £600 (first payment on account for 2025/26)
2. July 31, 2026: Pay £600 (second payment on account for 2025/26)
3. January 31, 2027: Balance payment or refund after completing the 2025/26 tax return, plus first payment on account for 2026/27

If Your Income Changes

If you know your income will be lower in the current tax year than the previous one, you can apply to reduce your payments on account. This also reduces the student loan repayment portion.

However, be cautious: if you reduce your payments too much and end up owing more, HMRC may charge interest on the underpaid amount.

Understanding how to calculate your self-employed student loan repayments can help you budget effectively and avoid surprises.

Basic Calculation Method

The formula is straightforward:

Where:

• Total Taxable Income = Your profits from self-employment plus any other taxable income
• Annual Threshold = The threshold for your specific loan plan
• Repayment Rate = 9% for Plan 1, 2, 4, and 5 loans; 6% for Postgraduate Loans

Example Calculations

Let's look at some examples for different loan plans:

Example 1: Plan 2 Self-Employed Graduate

• Annual profits: £35,000
• Plan 2 threshold (2025/26): £27,295
• Calculation: (£35,000 - £27,295) × 9% = £693.45 annual repayment

Example 2: Plan 5 Self-Employed Graduate

• Annual profits: £32,000
• Plan 5 threshold (2025/26): £25,000
• Calculation: (£32,000 - £25,000) × 9% = £630 annual repayment

Example 3: Graduate with Both Undergraduate and Postgraduate Loans

• Annual profits: £40,000
• Plan 2 threshold: £27,295
• Postgraduate Loan threshold: £21,000
• Plan 2 calculation: (£40,000 - £27,295) × 9% = £1,143.45
• Postgraduate calculation: (£40,000 - £21,000) × 6% = £1,140
• Total annual repayment: £2,283.45

Accounting for Deductions and Allowances

When calculating your student loan repayments:

• Business expenses reduce your taxable profits and therefore your repayment amount
• Personal pension contributions can reduce your student loan repayments (if made through Self Assessment rather than a private pension provider)
• The Personal Allowance (tax-free amount) does not reduce your student loan repayment calculation

Many self-employed professionals choose to operate through a limited company. This structure affects how student loan repayments are calculated.

How Limited Companies Affect Student Loan Repayments

When you work through a limited company:

• You're typically both a director and an employee of your company
• You may take income as a combination of salary and dividends
• Only your salary is subject to PAYE, where student loan deductions happen automatically
• Dividend income is reported through Self Assessment

Salary vs. Dividends

Both salary and dividend income count toward your student loan repayment threshold:

• Salary: Deducted through PAYE if above the monthly/weekly threshold equivalent
• Dividends: Included in your Self Assessment and subject to student loan repayments if your total income exceeds the threshold

Common Tax Strategy and Its Impact

Many limited company directors pay themselves a salary up to the National Insurance threshold and take the rest as dividends for tax efficiency. This strategy can affect student loan repayments:

• A low salary (below the monthly student loan threshold) means no automatic PAYE deductions
• All student loan repayments on dividend income are made annually through Self Assessment
• This can result in larger annual payments rather than smaller monthly ones

Example Calculation for a Limited Company Director

A Plan 2 graduate operating through a limited company with:

• Annual salary: £12,570 (no PAYE student loan deductions as below monthly threshold)
• Annual dividends: £30,000
• Total income: £42,570
• Plan 2 threshold: £27,295
• Calculation: (£42,570 - £27,295) × 9% = £1,374.75 annual repayment through Self Assessment

Many graduates have a combination of employment and self-employment income, which requires careful management of student loan repayments.

How Mixed Income Is Treated

When you have both employed and self-employed income:

• Your employed income is subject to PAYE deductions if above the monthly/weekly threshold
• Your self-employed income is assessed annually through Self Assessment
• HMRC considers your total income from all sources when calculating whether additional repayments are due

Avoiding Overpayment

With multiple income sources, there's a risk of overpaying your student loan if each income stream is assessed separately. HMRC should reconcile this through your Self Assessment by:

• Looking at your total annual income from all sources
• Calculating the correct annual repayment amount
• Crediting any PAYE student loan deductions already made
• Either requesting additional payment or arranging a refund

Example of Mixed Income Calculation

A Plan 2 graduate with:

• Part-time employment income: £18,000 (below the monthly threshold, so no PAYE deductions)
• Self-employed profits: £15,000
• Total income: £33,000
• Plan 2 threshold: £27,295
• Calculation: (£33,000 - £27,295) × 9% = £513.45 annual repayment through Self Assessment

Part-Year Employment and Self-Employment

If you transition between employment and self-employment within a tax year:

• PAYE deductions will have been made based on your monthly/weekly income during employment
• Self Assessment will consider your total annual income
• Timing differences can lead to different repayment patterns than if you had a single income source all year

Self-employed graduates often encounter specific challenges with their student loan repayments. Here are the most common issues and how to resolve them.

Unexpected Large Payments

Many self-employed graduates are surprised by the size of their annual student loan bill.

• Why it happens: Unlike PAYE where repayments are spread monthly, self-employed repayments come as one or two larger annual payments
• Solution: Set aside 9% of income above your threshold throughout the year (separate from your tax savings)

Incorrect Plan Type on Tax Return

Selecting the wrong plan type is a common error with significant consequences.

• Why it matters: Different plans have different thresholds, potentially causing you to over or underpay
• Solution: Check your plan type with the Student Loans Company before completing your Self Assessment
• If you make a mistake: Contact HMRC as soon as possible to correct your tax return

Missing the Payment Deadline

Late payments can result in penalties and interest charges.

• Consequences: Interest on the late payment plus potential penalties
• Solution: Set reminders for both the Self Assessment deadline (January 31) and the Payment on Account deadline (July 31)
• If you can't pay: Contact HMRC about setting up a payment plan before the deadline

Double Counting of Income

Sometimes income gets counted twice for student loan purposes.

• How it happens: Usually when you don't correctly report PAYE deductions already made on your Self Assessment
• Solution: Keep records of all student loan deductions from payslips and ensure these are accurately reported on your tax return
• If you overpay: You can claim a refund through HMRC

Dealing with Variable Income

Fluctuating income can make payments on account challenging.

• The issue: Payments on account are based on previous year's income, which may not reflect current earnings
• Solution: If your income is decreasing, apply to reduce your payments on account; if increasing, save extra for the balancing payment

Good record-keeping is essential for self-employed graduates with student loans. It helps ensure accurate repayments and provides protection in case of queries from HMRC.

Essential Records to Keep

Make sure you maintain the following records:

• Income records: All invoices, receipts, and bank statements showing business income
• Expense records: Receipts and evidence for all business expenses claimed
• PAYE records: Payslips showing any student loan deductions already made through employment
• Self Assessment submissions: Copies of all tax returns and the student loan sections
• Payment records: Evidence of all payments made to HMRC, including student loan components
• Student Loans Company correspondence: Annual statements and other communications

Digital Record-Keeping Systems

Consider using:

• Cloud accounting software: Many packages now have specific features for tracking tax and student loan liabilities
• Dedicated apps: For capturing receipts and tracking income on the go
• Spreadsheets: Create a separate column for tracking the student loan portion of your tax savings

How Long to Keep Records

HMRC requires self-employed individuals to keep records for at least 5 years after the January 31 Self Assessment deadline for each tax year. However, for student loan purposes, it's advisable to:

• Keep records for the entire duration of your student loan
• Maintain evidence of the final payoff when your loan is completely repaid
• Request a refund if you've overpaid, which requires supporting documentation

Annual Review Process

Develop a routine to stay on top of your student loan repayments:

1. Check your annual statement from the Student Loans Company (typically issued in April)
2. Reconcile this with your own records of repayments made
3. Query any discrepancies with the Student Loans Company
4. Review your repayment strategy based on changing income or threshold adjustments
5. Adjust your savings plan for the coming year if necessary