The self-assessment student loan trap

The tax position for most employees is usually straightforward, but it’s possible for issues or peculiarities to arise for some. For example, the ATT (Association of Taxation Technicians) last year raised an issue with HMRC of how taxpayers with a student loan were potentially overpaying tax where they have payrolled benefits. Student loans repayments can also represent a complication for some employees with multiple jobs, and simply being required to submit a tax return can result in a much higher bill to pay.

Fiscal drag and tax liabilities like the High Income Child Benefit Charge (HICBC) may well result in more employees being required to submit a tax return in the coming years. The recent Autumn Budget confirmed that the government will not be proceeding with planned reforms to the HICBC that may have effectively increased the thresholds at which this is paid for some. As a result, those parents impacted may need to submit tax returns in the future, although it is proposed that it will be possible for the HICBC to be paid through Pay As You Earn (PAYE). For some parents, that could be really important to avoid a costly addition to their tax bill. 

The potential problem for employees can arise when a taxpayer has more than one employment source, an outstanding student loan, and meets the criteria for completing a self-assessment tax return. In particular, they can end up paying up more in student loan repayments than someone else in similar circumstances that isn’t in self-assessment.

The level of someone’s student loan repayments is determined by their level of income. The rules differ slightly depending on the type of student loan, but using Plan 2 as an example, someone will usually be liable to pay 9% of their income over £27,295 towards their student loan. But what happens if someone has multiple employments? HMRC’s own guidance states that if you have more than one employment:

“You’ll only make repayments from jobs where you’re paid over the threshold for your plan type, not your combined income.”

So ordinarily, you would only pay student loan repayments on a particular employment where the salary on that job exceeds the student loan repayment threshold, and it is not immediately clear from HMRC’s guidance that the position is different for employees required to submit tax returns. The usual situation is illustrated by HMRC in one of their follow-on examples:

“You have a Plan 2 loan and you have two jobs. Before tax and other deductions, you’re paid £2,300 (£27,600 per annum) a month from one job and £500 (£6,000 per annum) a month for the other. You will only make repayments on the income from the job that pays you £2,300 a month because it’s above the £2,274 threshold.

So far so simple, but let’s increase the main employment income in this example to £65,000 per annum and add in child benefit for one child. The taxpayer’s income is £71,000 (£65,000 plus £6,000) and they now meet the criteria to complete a tax return, as they need to repay a proportion (£732) of the child benefit, as total income exceeds £60,000.

By completing a tax return the taxpayer, in addition to repaying the child benefit, will also incur an additional student loan repayment of £540. This is 9% of the £6,000 income from the second job.

The issue here is that, once an individual is required to complete a tax return, student loan repayments are generally calculated based on their total income. However, provided they are not required to complete a tax return, the responsibility for deducting student loan repayments will be their employers’ responsibility. Seemingly, in order to keep things simple for employers, student loan repayments are assessed on income from each employment on an individual basis.

The result is that individuals with more than one job can be subject to significantly higher ongoing student loan repayments, simply because they are required to file a tax return, regardless of the reason for being required to file one.

This will give more taxpayers the motivation to stay outside of the requirement to submit tax returns if they can, but successive governments are making that harder with their policies as more people are pulled into the self-assessment net.