With over 7 months to go before the start of the 2020/21 tax year, already we know two thresholds that will apply: The Plan 1 threshold will be £19,390 (from £18,935). The Plan 2 threshold will be £26,575 (from £25,725). The Education (Student Loans) (Repayment) Regulations 2009 govern how the repayments and thresholds are calculated in the United Kingdom.
Student Loans 2020/21
I don’t like to take announcements at face value and always think it’s interesting to know how these are corroborated in legislation. It is not an easy formula but I will go though it nevertheless.
The legislation says that the repayment threshold for the forthcoming tax year is:
- The repayment threshold for the previous repayment inflated by
- ‘The percentage increase between the retail prices all items index published by the Office for National Statistics for the two Marches immediately before the commencement of the previous [repayment threshold year]’
This is rounded up to the nearest £5.
Essentially, and simply, the threshold for 2020/21 is the 2019/20 threshold multiplied by the Retail Prices Index at March 2019. This was 2.4%.
Therefore, the Student Loan threshold for 2019/20 is calculated as follows:
- The 2019/20 threshold £18,935 + 2.4% = £454.44
- Rounded up to the nearest £5 which is £19,390.00
These apply in England and Wales only.
The 2009 legislation says that the repayment threshold for the following tax year is ‘an amount equal to A + (A x B) and rounded up to the nearest £5 where:
- A is the repayment threshold for the previous repayment threshold year, and
- B is the relevant percentage difference in average earnings’
The query, therefore, is what is meant by ‘the relevant percentage difference in average earnings’. This was clarified by The Education (Student Loans) (Repayment) (Amendment) Regulations 2018 which describes it as:
‘The percentage difference between the average earnings in periods 1 and 2, as published on the website of the Office for National Statistics on the last day of June that follows period 2, where:
- Period 1 is the three month period consisting of January to March in the calendar year prior to period 2; and
- Period 2 is the three month period consisting of January to March ending a calendar year and six days before the beginning of the repayment threshold year’
So, to work out how the Plan 2 threshold is calculated for 2020/21 requires us to look at the difference in average earnings between January to March 2018 and January to March 2019. The Office for National Statistics’ publication showed that average earnings between the two periods had increased by 3.3%.
Therefore, the Student Loan threshold for 2020/21 is calculated as follows:
- The 2019/20 threshold £25,725 + 3.3% = £848.925
- Rounded up to the nearest £5 which is £26,575.00
New from April 2019, this threshold is set at £21,000 with a repayment rate of 6% (compared to 9% for Plans 1 and 2).
There is no legislative provision for this to be incremented by any complex calculation and the news story confirms that this will remain as £21,000 in 2020/21.