There are currently two student loan plan types payable through the payroll, and which one depends upon when the first year of studies were started. Plan 2 is where the first year of studies were started after 1st September 2012, and Plan 1 is where the studies were started before this.
The interest rates charged on each loan type are also different, with 1.75% on plan 1 and RPI (currently 3.3%) to RPI + 3% for Plan 2. For more information on how much is repaid see here.
For employers you need to know when a student loan is repayable through the payroll, and where plan type is not known the default is Plan 1. HMRC have said they will always issue a student loan start notice together with the plan type where a new employee should be repaying the loan.
We should also mention that some employees may have other student loans taken before 1998 that are not normally taken through payroll, and are based on a fixed term.
Thresholds for repayments increase in April
From April 2019 the threshold for Plan 1 will be increased by £605 to £18 935 pa, and for Plan 2 by £725 to £25 725pa. These equate to around £1575 and £2140 per month.
Plan 1 and Plan 2 are both paid back at a rate of 9% on earnings above these thresholds.
Post Graduate Loan repayments starting April 2019
Post graduate loans are a new type of student loan that will first become eligible for repayment from April 2019. There is currently only one type of Post Graduate Loan as far as payroll is concerned, and hopefully this will remain so.
The interest is calculated in a similar fashion to Plan 2, so RPI + 3%, and updated each September.
Repayments are at 6% and paid above a threshold of £21 000pa, or £1750 per month.
It is possible to have multiple loans and pay up to 15% of student loan repayment, this is where an employee has a Plan 1 and/or Plan 2 and a Post Graduate Loan. The different thresholds would still apply.
Student Loans are not as straightforward as they could be, and there are other aspects not covered here that could catch people out in payroll, such as Attachment of Earnings Orders. Employee questions about student loans are not uncommon, but the answers are not always simple to find.
If you want more general information on student loans, or your employees have further questions, you can follow this link.