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Yes, you do have to pay back your student loan if you are self-employed in the UK. Being your own boss does not wipe out your student debt. However, you will only make payments if your business profits go above a certain amount.
A Simple Guide to Paying Your Student Loan When Self-Employed
Becoming self-employed is exciting, but dealing with your own taxes can feel a bit overwhelming at first. If you have a student loan, the way you pay it back changes when you start working for yourself. Here is everything you need to know in simple terms.
How Does It Work?
When you work for an employer, they automatically take your student loan payments out of your wages before you even see the money. When you are self-employed, it works a little differently.
Instead of paying every month, you pay your student loan through your Self Assessment tax return once a year.
When you fill out your tax return, there is a specific question asking if you have a student loan to repay. You must tick this box. HM Revenue and Customs (HMRC) will then look at your total profits for the year. If you have earned enough, they will calculate what you owe and add your student loan payment to your final tax bill.
When Do You Have to Pay?
You do not have to pay anything if your income is low. You only start paying when your profits go over your “threshold.” A threshold is simply the minimum amount of money you need to earn before payments kick in.
Your threshold depends on which student loan plan you are on:
- Plan 1: For students who started their course before September 2012.
- Plan 2: For students who started between September 2012 and July 2023.
- Plan 4: For Scottish students.
- Plan 5: For students who started their course after August 2023.
- Postgraduate Loan: For students who took out a loan for a Master’s or Doctoral degree.
The government sets a different earning threshold for each plan. If your profits stay below your plan’s threshold, you will not have to pay a single penny towards your loan that year.
How Much Do You Pay?
If you do earn over your threshold, the math is fairly straightforward. You do not pay a percentage of your total income; you only pay a percentage of the money you earn above the threshold.
- You pay 9% of the money you earn over the threshold for Plans 1, 2, 4, and 5.
- You pay 6% of the money you earn over the threshold for Postgraduate loans.
You do not need to do this math yourself. HMRC will work out the exact number for you when you submit your Self Assessment.
What If You Have a Job and a Side Hustle?
Many people have a regular job where they get a payslip, but also run a self-employed side hustle. In this case, HMRC looks at your total income from both.
Your employer will continue to take student loan payments from your regular wages. Then, when you do your tax return for your side business, HMRC will check your overall income. If your self-employed profits push you further over the threshold, they will add the extra student loan amount you owe to your tax bill.
Top Tips for the Self-Employed
- Always declare it: Make sure you tell HMRC about your student loan on your tax return.
- Save up: Because your loan repayment gets added to your yearly tax bill, your final bill in January will be higher than if you were just paying regular Income Tax. Put a percentage of your earnings aside every month so you are not caught out.
- Keep clear records: Keep good track of what you earn and what you spend on your business to ensure your profit calculations are accurate.
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