If you’ve ever had a student loan and have now become self-employed then it’s important to know that the way you now repay your student loan is very different to the method if you were employed via PAYE. Once you become self-employed you will automatically need to start repaying your student loan once you earn over a certain threshold, which I’ll explain in more detail below since the threshold will all depend on which year your course started.
The actual amount you owe is calculated automatically by HMRC as per the figures you input within your end of year Self-Assessment Tax Return. The amount will vary depending on which year your curse started (more to follow on that) and you’ll then owe this amount upon submission and receipt of your tax return to HMRC. So the payments won’t come out automatically like they would within your PAYE payslip if you were employed, instead HMRC calculate how much you owe depending on how much you earned in that year and you’ll need to pay that amount upfront.
So a top tip here – throughout the year, be sure to have a rough estimate in your head as to how much this amount will be and put that amount aside with each payment you earn, just so that you aren’t caught unaware with a large amount to pay at year end!
How Much is your Student Loan Repayment?
So how much will you pay? Well there are 2 plans and which plan you are on depends on which year your course started (figures accurate as of November 2018):
Plan 1 – if your course started before 1st September 2012.
Plan 2 – if your course started on or after the 1st September 2012.
It really is that simple to work out which plan you are on! Then once you know which plan you are on, it’s easy to know how much you are going to need to repay:
If you are on Plan 1 then you will pay 9% of anything you earn over £18,330 per year.
If you are on Plan 2 then you will pay 9% of anything you earn over £25,000 per year.
When I say ‘earn’ I mean your turnover, not profit! So if you made a total income below the threshold then you will not be required to pay anything towards your student loan (although it’s always advisable to put something towards it each year to bring the amount down). As soon as you earn a penny over that threshold, you will have to pay 9% on that amount.
This sometimes confuses people in regards to (for example) “so do I pay 9% on £18,3300?”. The answer here is ‘no’ you only pay 9% on any amount over the threshold. So let’s take a quick example just to clarify:
You are on Plan 2 and earn a total income of £30,000 in one year. Your threshold is £25,000 – therefore you will only have to pay 9% on £5,000 (the difference between £25,000 threshold and the total income of £30,000) which equals £450. So in this scenario you’ll have to pay HMRC £450 as soon as you submit your tax return. Therefore as I mentioned above, be sure to keep an eye on your earnings and as soon as you notice you’re about to earn over that threshold, be sure to put aside 9% of everything you earn just to be safe at year-end.
And that’s how to pay your student loan when self-employed!