A miscalculation of student loan repayments has led HMRC to apologise for overpayments affecting around 16,000 taxpayers.
HMRC has apologised for an error in the calculation of student loan repayments leading to over-repayments of the outstanding student loan for around 16,000 taxpayers.
The mistake occurs where payrolled benefits in kind (BIKs) that are not subject to Class 1 national insurance contributions (NICs) are incorrectly included in the PAYE income declared on the taxpayer’s self assessment return.
“Earnings” on which student loan repayments are based include any BIKs on which Class 1 NICs are payable, such as meal vouchers, but not those that are subject to Class 1A, for example, company cars. So if an employee is provided with a Tesla Model 3 and also £5 of luncheon vouchers, only the luncheon vouchers should be included when calculating earnings for the purpose of the student loan repayment amount.
Most BIKs reported on an employee’s P11D are subject to Class 1A and not Class 1 NICs so should not be included in the earnings figure. Payroll software should automatically ignore benefits not subject to Class 1 NICs when calculating earnings to generate the student loan deduction. However, because the self assessment system is unable to distinguish payrolled BIKs from the total PAYE income amount, those not subject to Class 1 NICs have been incorrectly included in the calculation, resulting in the student loan repayment being too high.
Who is affected?
The error dates back to 6 April 2016 when the payrolling of BIKs was introduced on a voluntary basis. HMRC estimates that around 16,000 taxpayers have been affected, with the average over-repayment of the student loan estimated at £104 in total for all affected years.
According to HMRC’s Agent Update 112, this error only impacts taxpayers who are:
- repaying a student loan and
- receiving payrolled BIKs that are not subject to Class 1 NICs though their employer and
- in self assessment.
Those taxpayers now have a choice between receiving a refund or leaving the overpayment – which has already been sent to the student loans company – offset against their loan, reducing the balance and any interest that may be due. HMRC has written to all affected student loan borrowers to apologise for the error and explain their options and what steps they need to take.
Temporary fix
The tax authority is working to fix the error and allow the relevant BIKs to be entered separately from total PAYE income on the self assessment return. However in the meantime additional steps are required when completing the return on behalf of a taxpayer with a student or postgraduate loan balance outstanding, to ensure the correct repayment amount is charged.
For returns completed online these steps are as follows.
- Deduct relevant payrolled BIKs from total PAYE income as shown on the P45 or P60.
- In the “Fill in your return” section (section 4) enter the figure from step 1 into the “pay from employer” (box employment 03).
- Select “yes” when asked if taxable benefits were received from the employer.
- In the next section, enter the relevant payrolled BIKs figure in the “other benefits” box (box employment 20).
- Enter the following note in the “additional information” box: “I have entered my payrolled benefits in kind in the ‘other benefits’ section as I’m a student loan borrower.”
Additional information and advice has been published at gov.uk, and agents can contact the Agent Dedicated Line on 0300 200 3311 for further support.
An HMRC spokesperson said: “We’re writing to customers whose self assessment tax returns have been affected, apologising and explaining what they need to do. We’ve introduced a temporary solution and aim to have a permanent fix for the 2024/25 tax year.”
Student loans overhaul
This comes at a turbulent time for student loans as the new “Plan 5” student loans are introduced for students starting an undergraduate course this month.
Students who take out a loan on or after 1 August 2023 will start repaying that loan when their income before tax and other deductions reaches the new threshold of £25,000 (compared to £27,295 for Plan 2 student loans). The period after which any outstanding loan balance will be written off is increased from 30 years to 40 years, while interest will be applied at the retail price index (RPI) only (for Plan 2 loans it is RPI plus up to 3%).
These changes are estimated to increase the percentage of graduates who pay their loans off in full from 23% to 52% according to the Department of Education, resulting in substantial savings for the treasury. Borrowers under Plan 5 are not due to come into repayment until April 2026 as repayment begins in the April after the borrower leaves university.
The Labour party has hinted at plans to overhaul these changes if elected to power, although promises by the opposition party to abolish university fees entirely have been dropped.