Student loan deductions

In response to questions from employers, the Inland Revenue has clarified the procedures to be followed if an SL1 Start Notice is received but the employee leaves before the date given on the form for starting the deductions.

• If form SL1 shows a start date in the current tax year and the employee is leaving the employment before that date, a "Y" should be entered in box 5 of form P45, "Continue student loan deductions?"
  
  
• However, if the start date on form SL1 is in the following tax year and the employee is leaving in the current tax year, box 5 of form P45 should be left blank.

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...back to 21 May 2004


Sources: www.inlandrevenue.gov.uk/comp/notes-10-18-1.pdf
www.inlandrevenue.gov.uk/pdfs/ir59.htm)

Student Loan deductions

The Inland Revenue has issued an updated version of booklet IR59 Collection of Student Loan - A guide for employers. This booklet gives more extensive guidance than that contained in the E13 booklet. The following differences should be not.

• There are now three defined situations in which employers should stop making deductions. In addition to receiving a Stop Notice (form SL2) or an exceptional urgent instruction to stop by telephone or letter, there is a new third reason. In the case of an Educational Institution or a Local Education Authority, the Student Loans Company may send an instruction to stop making deductions for teachers who have been accepted by the Repayment of Teachers' Loans scheme.
• Deductions should not be made while deductions are being made under an Income Support Deduction Notice. This restriction already applies to Council Tax orders.
• If an employee leaves and, before the P45 is issued, a Start Notice is received that gives an instruction to start deductions from a date in the next tax year, the box (item 5) "Continue Student Loan Deductions" on the P45 should be left blank. Conversely, if a P45 is received with item 5 ticked but the employee states that deductions should not start before the next tax year, the employer should contact the tax office for guidance.

(Source: www.inlandrevenue.gov.uk/pdfs/ir59.pdf (or ir59.htm)
...back to 18 April 2003

"Look after the pounds…" continued again!

Issues 204 and 210 of Payroll Briefing described the on-going saga of the "penny-rounding" problem that arises when an employer has to make student loan deductions for an employee who also has a priority court order. The Revenue announced, in its September 2001 issue of Notes for Payroll Software Developers, that new Regulations would be introduced from April 2002 to ensure that student loan deductions are only ever taken in whole pounds, thereby avoiding the problem of not being able to report the pennies on the employee's P14, or reconcile the P35 exactly.

In the event, the Department for Education and Skills (DfES) failed (forgot?) to introduce the amendment Regulations. Officially, therefore, in the situation described above, student loan deductions should continue to include pennies, if appropriate. The DfES press office has advised the author that the necessary Regulations will be prepared as soon as possible. Employers should follow the new rule and, in any case, developers of payroll systems will have changed their systems so that pennies are no longer deducted for any student loan deductions.

Another amendment to Regulations also failed to be produced, namely the inclusion of Income Support Deduction Notices (ISDNs) among the court orders that prevent an employer from making student loan deductions for as long as they are being deducted. For details of ISDNs, see the Payroll Handbook, in the sections on Attachment of Earnings and Student Loan Deductions. Again, employers should proceed as if the amended rules were in place and hold in abeyance any student loan deductions until the ISDN is repaid in full. The DfES will put the amendment Regulations in place in due course.
Payroll Briefing 224 - 23 May 2002

Income Support Deduction Notices

At present, student loan deductions may not be made when the employee has to make payments under Community Charge and Council Tax Attachment of Earnings Orders and Scottish court orders. A further category of order is to be added to that list, namely Income Support Deduction Notices (ISDNs). The student loan deductions start, or are resumed, when the total deduction defined in the order has been taken.

ISDNs are issued to employers by the Department of Work and Pensions and require employers to make deductions from pay in order to recover amounts of Income Support paid to the employee in the period immediately following a return to work after a trade dispute. The Notices define a level of protected earnings and the total amount to be deducted. From April 2002, no student loan deductions may be taken when a deduction must be made under an ISDN. - Payroll Briefing 210 - 11 October 2001

"Look after the pounds…", continued

Issue 204 of Payroll Briefing described the problems caused to P14 and P35 reporting when an employee is liable for both student loan deductions and priority court order deductions. Student loan deductions are normally taken in whole pounds. However, when both deductions have to be made from the same earnings, the resulting student loan deduction may include pennies. As these cannot be reported on either of the year-end returns, the employee's loan account is not credited with the pennies and the employer cannot reconcile the P35 'to the penny'.

In acknowledging the problem, the Revenue suggested that this anomaly would be corrected "as part of wider improvements to the Collection of Student Loans system". However, the Revenue has now accepted the much simpler solution that we suggested in the Issue 204 article, namely that the rules should be changed so that only whole pounds are deducted when student loan deductions compete with court orders. If pennies can never be deducted, the problem goes away completely. Regulations are to be introduced that will take effect from 6 April 2002. As a result, the problem may still arise on P14s and P35s for the 2001/02 tax year.

To illustrate the change, the student loan deduction for an employee with a salary of £1450 would be expected to be £55.50, rounded down to £55. If the employee has a priority attachment of earnings order defining protected earnings of £950 and a monthly deduction of £150, the amount available for the student loan deduction, assuming attachable earnings of £1125.75 and after taking the full court order deduction, would be £25.75, i.e. £1125.75 - £950 - £150. Under current rules the full £25.75 would be deducted, but the 75p could not be reported on the employee's P14, nor could it be reconciled on the employer's P35. The new rule, from April 2002, will mean that the deduction will be rounded down to £25 exactly. - Payroll Briefing 210 - 11 October 2001

Student loan deductions

The Inland Revenue has published a new and more extensive booklet, IR59, about Student Loan Deductions. It includes a number of flowcharts to explain the normal procedures for handling deduction errors, Start and Stop Notices, starters and leavers, and more precise information for handling deductions when the employee's pay frequency is not weekly or monthly, or when the employee has a court order. Confirmation is given of how to handle the "pennies" problem as explained in the news item "Look after the pounds…" in issue 204 of Payroll Briefing.

The instructions for what to do if an employee dies have changed. No deductions should be taken from any wages still to be paid.

A new instruction relates to an employee who leaves after the employer has received a Stop Notice but before it is to take effect. In that situation, a 'Y' should not be entered in box 5 on the leaver's P45. - Payroll Briefing 206 - 19 July 2001

"Look after the pounds…"

The Inland Revenue and the Student Loans Company do not appear to have heard the old proverb about looking after the pennies. The general rules when making student loan deductions is that the calculated deduction, i.e. 9% of earnings in excess of the pay period equivalent of £10,000 per year, is rounded down to a whole pound, even if that means knocking off 99p. Why they should have decided to handle deductions in whole pounds has not been explained but it may well be because the Deduction Tables would have been at least ten times thicker if the deductions had been to the penny.

As a result of the rounding, the payments made to the Collector each month are in whole pounds, and the amounts entered on individual P14s and on the summary P35 after the year-end are also in whole pounds. In fact, the entry boxes on those forms do not allow the entry of pence.

An exception

There is one situation where the whole pound rounding does not apply. When an employee with a Student Loan deduction in force also has a priority Attachment of Earnings Order or a Deduction from Earnings Order, the court order must be deducted first and the amount of the Student Loan deduction is then limited by the protected earnings defined in the court order. The Revenue's instructions for that situation are that, where there are only sufficient attachable earnings left to take part of the loan deduction, that remaining amount is taken in full, including any pence. The total deduction, including the pence, is remitted to the Collector.

As a result, the total deductions for the year for that employee include an amount of pence that cannot be entered on either the P14 or the P35. There are two implications of this:

1. Although the pence have been paid to the Collector, only the whole pound below is entered on the employee's P14 and it is that
amount that is reported to the Student Loans Company. The employee's loan account is not credited with the pence.

2. When completing the reconciliation on the reverse of the P35, it will be impossible to reconcile "to the penny" the total payment due
for the year with the amount sent to the Collector for the year.

The Revenue's rationale

The Revenue has provided the following explanation about these discrepancies:

"We agree with the analysis of what happens to odd pence when an attachment order combines with a Student Loan deduction. The employee does not receive credit for odd pence deducted because that is how the Inland Revenue and Student Loan Company systems work at the moment. The maximum any employee could lose is 99p in a whole year, and remedial work to change the systems for this problem alone would be disproportionate.

"If any borrower is concerned about the loss of a few pence and contacts the Student Loan Company or the Inland Revenue, then the amount in question can be credited to the borrower's account by manual intervention. Given the small numbers of borrowers likely to be affected, and the tiny amounts involved, this is a more sensible way of dealing with the issue for the time being than changing the systems.

"From the employer's point of view, an apparent overpayment to the Inland Revenue will arise because the P35 will show less to have been deducted than has been paid. That overpayment will be treated like any other employer overpayment. Depending on the size of the amount and any other amounts owed to or from the employer, it may be set against another debt, repaid, or held as a credit which can be repaid if claimed.

"In the longer term there may be scope for ironing out this anomaly as part of wider improvements to the Collection of Student Loans system. Representatives of employer and payroll organisations are being consulted on the scope for such improvements, and a review of the impact of the system on small businesses is to be carried out."

The Revenue is correct in stating that the problem is insignificant, at least at present. But, with getting on for 200,000 students leaving university each year with loans of £10,000 or more to repay, the situation is likely to occur more frequently in future. However, rather than change computer systems, it would make more sense to change the instructions so that only whole pounds are taken when the student loan deduction competes with a court order. If pence can never be deducted, the problem goes away. - Payroll Briefing 204 - 21 June 2001