It is the time of year when the job market is populated with new graduates, fresh from receiving their university results, and a great time for your business to pick out a talented new hire.
Hiring recent graduates is a great way to inject new ideas and energy into your team.
However, managing payroll for graduates comes with specific responsibilities, especially when it comes to handling student and postgraduate loan repayments.
Student loan repayments
Graduates will be assigned to different payment plans depending on when they started their course. The criteria for these plans are below:
- If they started the course before 1 September 2012 – Plan 1
- If they started the course between 1 September 2012 and 31 July 2023 – Plan 2
- If they applied to Student Awards Agency Scotland – Plan 4
- If they started the course on or after 1 August 2023 – Plan 5
Postgraduate loans are given to those who studied a postgraduate master’s or doctoral course.
The earnings thresholds for student loans are as follows:
- Plan 1: £24,990 annually (£2,082 monthly)
- Plan 2: £27,295 annually (£2,274monthly)
- Plan 4: £31,395 annually (£2,616 monthly)
- Plan 5: £25,000 annually (£2,083 monthly)
- Postgraduate loans: £21,000 annually (£1,750 monthly)
Graduates will start repaying their student loans when their income exceeds the respective threshold for their loan plan.
The repayment rate is nine per cent of the income above the threshold for Plan 1, 2, 4 or 5 loans, and six per cent for postgraduate loans.
For example, a graduate earning £35,000 under Plan 2 will repay £75 per month, while someone earning £50,000 will start with monthly repayments of £187.50.
Handling payroll for graduates with student loans
When you receive a start notice (SL1 or PGL1) from HM Revenue & Customs (HMRC), you must check the loan or plan type and the start date on the notice.
This ensures your payroll is set up correctly, so the employee does not overpay or underpay their loan.
Make sure you use the correct plan type as indicated on the SL1 or PGL1 notice.
If your employee is unsure about their plan type, they can verify it by logging into their student loan account online.
If your employee’s earnings exceed the repayment threshold for their loan plan, start deductions immediately.
If deductions are not made and HMRC sends a reminder, act quickly to avoid further issues.
Keep making deductions until you receive an SL2 or PGL2 stop notice from HMRC.
This notice will indicate when to stop making deductions, and it’s important to follow these instructions to the letter.
If an employee claims they never had a student loan, you must still proceed with the deductions as per the start notice until HMRC instructs otherwise.
If you engage employees through their own companies, remember that your business is not responsible for deducting student or postgraduate loan repayments.
The employee will manage these obligations through their own tax return.
In the unfortunate event of an employee’s death, do not make any deductions from payments made after their death, as these payments are exempt from student loan deductions.
Why accurate payroll management matters
Accurately managing payroll, especially when dealing with student loan repayments, is crucial for compliance and maintaining employee trust.
Overpayments or underpayments can lead to complications and dissatisfaction among your team.
HMRC has made it clear that payroll errors can trigger reminders, and failure to act on these can result in direct contact from HMRC.
If you’d like support with setting up payroll for graduates with student loan obligations, we are here to help. Contact us today.
