Starting in 2016 Payroll departments UK-wide will have to administer two Income Contingent Student Loans through the payroll.
- Plan 1 with a threshold of £17,495 per annum
- Plan 2 with a threshold of £21,000 per annum
(Plan 2 loans apply where the home address was in England or Wales and the course of further education started on or after 01 September 2012.)
From February 2016, HMRC will make available a new Starter Checklist on the Gov.UK Website. This contains four declarations that the new employee needs to consider a yes or no answer to, in contrast to the current one declaration. These four declarations are detailed below together with my comments. Note that there is no statutory reason that these declarations are asked in this order, indeed, it may make sense to ask them in another order. Further, employers need to remember that the fundamental reason for asking questions in the first place is to ascertain:
- Is there a Student Loan that needs to be repaid?
- If so, is it Plan 1 or Plan 2?
|Do you have a Student Loan which is not fully repaid?||This is being asked to ascertain if there is a Student Loan in the first place||
|There is a need for the new employee / ex-student to continue with the other declarations|
|There is no further action required|
|Are you repaying your Student Loan direct to the Student Loans Company be agreed monthly instalments?||If the new employee has a Loan, generally, the requirement is that this is repaid through the payroll. Only people that were previously self-employed or working overseas would have a Loan that they are repaying the Student Loans Company directly||
|The new employee / ex-student does have a Loan, however, no action is required through the payroll until HMRC advise otherwise via the SL1|
|The new employee / ex-student has a Loan that needs to be repaid. Therefore, the following declarations need to be answered|
|What type of Student Loan do you have?||If the employee has a Loan, this declaration is where they will declare if it is Plan 1 or 2||Plan 1||Start Plan 1 in the payroll with an annual threshold of £17,495|
|Plan 2||Start Plan 2 in the payroll with an annual threshold of £21,000|
|Did you finish your studies before last 06 April?||The ex-student does not commence Loan repayments until the April following the year that they finished or left studies. Therefore, why not ask this question near the start to prevent an ex-student getting this far, only to find that they do not have to start repaying their Loan?!||Yes||Refer to the above answers to ascertain if they have a Plan 1 or 2 that employers need to action in the payroll|
|No||There is a Loan, however, there is no action required in the payroll. HMRC will advise when to start the deduction via the SL1|
Some ex-students starting in employment will not know their Plan type. As we should not be offering advice on this personal matter it is, therefore, probably responsible for employers to point out where they can obtain this information:
- When it is published, the Starter Checklist will contain basic information about what a Plan 1 or Plan 2 Loan is and employers may want to replicate this
- The ex-student should be referred back to their Loan agreement and associated paperwork
- Refer them to the SLC Website ‘Repayment Plan Types’. Upon entry of details of their Loan, this will advise whether it is Plan 1 or Plan 2
In the event that employers do get the Plan type wrong, there is the comfort that HMRC will send through a SL1 on receipt of the first FPS that contains a Loan deduction. If the Plan type stated on the SL1 is different from the Plan type being operated, the action for employers is to change the payroll in accordance with HMRC’s instructions.
Why should employers worry?
Employers should make every attempt to ascertain the correct Plan type before the first deduction is made in the payroll. The explanation is, simply, if we assume a Plan type and it is wrong, the ex-student / new employee has every reason to come back to the employer and request a recalculation. HMRC will regard errors in the current tax year as ‘correctable errors’ and will require the employer to make the adjustment in the payroll system.
Don’t assume – make every possible effort to get the Plan type from the starting employee. This is especially true of new employees starting who bring in a P45. The P45 will not be amended to show a Plan type and will just say that a Student Loan is in operation at the previous employment. If the employer does not ask the above questions, how will they know which Plan to operate?
Immediate Employer Actions
Two Plans leads could double the confusion that exists at the moment – new employees often do not tell payroll departments about the one Plan type, let alone adding another into the mix! Yet, employers need to be aware of importance of asking all new employees about any previous Student Loan and what Plan type it was. So, what should employers be doing NOW?
- Do you know the difference between a Plan 1 and a Plan 2? If not, read my previous posts or do some research
- Cintra’s payroll software for 2016 will accept the two Plan types and has been fully tested to ensure it conforms to requirements. It is worth noting that there is no requirement for the Plan type to be on the FPS
- Do you know where to refer ex-students / new employees for information? The Student Loans Company Website is a good starting point
- Have you updated any internal Starter Checklists for 2016/17 with the new declarations?
- How will you obtain Plan types from any ex-students that start from April 2016 with just a P45? Every new employee should be asked the Student Loan declarations questions
Employers are going to have to be proactive for fear of getting the Plan type wrong. We also need to keep our eyes peeled for Plans 3 and 4, though these will not apply through payroll in 2016/17!