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Student Loan Deduction Threshold
Thursday, March 24th, 2011
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The current £15,000 annual threshold for student loan deductions through the payroll was due for review by the last Government in 2011. The Coalition government decided instead to increase the threshold annually between 2012 and 2016 in line with inflation. The statutory changes for this have been made by means of amendments to the Education (Student Loans) (Repayment) Regulations 2009 and are effective from 6 April 2011.
The current £15,000 threshold continues to apply throughout 2011/12. For the 2012/13 tax year and the following three tax years, it will be increased in line with the Retail Prices Index (RPI). The new threshold for each year will be calculated using the percentage increase in the RPI at the March “immediately before the commencement of the previous tax year”, rounded up to the nearest £5. For example, if the year-on-year RPI increase at March 2011 is 4.4%, the threshold from April 2012 will be £15,660 (or perhaps £15,665).
Although not yet set in legislation, the government’s intention is to set the threshold at £21,000 in April 2016, the date when most students who commence a three-year degree course in September 2012 will first become liable to make repayments.
Further information:
The Education (Student Loans) (Repayment) (Amendment) Regulations 2011
Explanatory Memorandum to the Education (Student Loans) (Repayment) (Amendment) Regulations 2011
Emma says:
March 29th, 2011
10:45
Could anyone tell me what the most tax efficient way is to pay off the student loan of a valued member of our staff please?
Thanks
Emma
Ian Congreave says:
March 30th, 2011
07:27
Emma: As you are going to pay out money for this purpose, I can see no tax efficient method of doing it. Assuming you don’t want your employee to have to pay tax and NICs on the money you would have to gross up the amount needed to clear the loan by the appropriate tax and NICs rates and add that amount to the employee’s gross pay. The resulting net pay would then include the correct amount to settle the loan. For example, if the outstanding loan is £5,000, and the employee pays tax at 20% and NICs at 12%, you would have to pay £7,352.94 (£5000 ÷ 0.68) in theory, but there will be complications if the amount of the payment takes the employee into 40% tax for that month. You would also have secondary NICs to pay.
The other way of doing it is to pay off the loan direct with a cheque from the employer. That has it own complications, as you would have to (1) report the payment on form P11D and the employee would be liable for the tax, and (2) add the payment to gross pay for NICs purposes only.
Another approach has just occurred to me – you could increase your employee’s pay each month by the grossed-up value of the monthly loan repayment, so the net pay is as if the loan did not exist. That would also give you protection in case your employee decides to leave you after the loan has been paid off.
Unfortunately, none of these methods are tax efficient.