Accountancy firm warns businesses over student loan repayments for graduate hires

An accountancy firm has warned businesses that hiring graduates could create additional payroll responsibilities, particularly around correctly identifying and deducting student loan repayments.

Prime Accountants highlighted that the introduction of Plan 5, with its £25,000 repayment threshold, means even employees earning around the national living wage may now be liable for student loan deductions.

It urged employers to ensure they have accurate information about employees' repayment plans and process deductions correctly to avoid underpayments, overpayments, employee disputes and potential issues with HMRC.

While graduates offer fresh ideas and perspectives, they also bring extra payroll considerations that need to be prepared for.

If your business is planning for a strategic inclusion of new talent, speaking to an accountant can help get your payroll up to scratch.

The amount of student loan debt depends on a few factors, including the length of a degree programme and how much borrowing was needed to fund it.

However, student loans are tied to different repayment plans depending on their university enrolment dates:

· Plan 1: Threshold is £26,900 a year (nine per cent repayment rate) for students who started before September 2012 in England and Wales or Northern Irish borrowers.

· Plan 2: Threshold is £29,385 a year (nine per cent repayment rate) for English and Welsh students who started between September 2012 and July 2023.

· Plan 4: Threshold is £33,795 a year (nine per cent repayment rate) for Scottish students (Student Awards Agency Scotland).

· Plan 5: Threshold is £25,000 a year (nine per cent repayment rate) for English and Welsh undergraduate students starting courses from August 2023.

· Postgraduate loan: Repayments begin over earnings of £21,000.

To ensure you remain compliant with payroll regulations, you should make yourself aware of any undergraduate or postgraduate loans that need to be repaid.

As statutory minimum pay increases, graduates working on the National Living Wage (NLW) are now only a few hundred pounds below the Plan 5 repayment threshold.

The current UK NLW is £12.71 for workers aged 21 and over. This amounts to an annual pre-tax salary of £24,784.50 for a 37.5-hour week, or £26,436.80 for a 40-hour week.

This means that even roles that would historically not have triggered student loan repayments are now within reach of the Plan 5 threshold. Most graduate roles are also likely to pay above the repayment thresholds for the other plans.

The accountancy firm stressed that accurate payroll information is essential and that student loan repayments must be correctly handled for employees who are eligible to repay.

Associate Director at Prime Accountants, Kerrie Given, (pictured) has issued a clear warning for employers who may face challenges when getting payroll for graduates right.

Kerrie said: “Plan 5 has such a low threshold that many employers who never had to consider student loan repayments as part of their payroll will find that even their low-earning staff are affected,” Kerrie said. “Rather than hoping for the best, accountants should get professional support to ensure that student loan deductions are handled correctly.

“If too much or too little is taken, your employee will likely face financial difficulties and they will not be impressed with how their payroll has been handled. Your business may also draw the ire of HMRC if you are found to have neglected your duty.”

The firm warned that hiring graduates can create additional payroll considerations, making it important for businesses to avoid mistakes that could result in financial and administrative problems.

If an employer does not have accurate information about an employee’s student loan repayment obligations, incorrect amounts could be deducted from their wages. Graduates could consequently pay too much or too little towards their loans, potentially leading to employee dissatisfaction or correction requests from HMRC.

The firm also warned that HMRC could issue penalties or interest charges where payroll submissions are inaccurate or reporting obligations are missed.

Investigating errors and making payroll adjustments could also increase administrative costs for businesses.

The firm therefore suggested that seeking professional accountancy advice could help businesses avoid additional costs in the long term.

The accountancy firm said its accountants can help ensure student loan repayments are accurately deducted from employees’ wages and that payroll records are kept up to date.

While graduates can represent a valuable strategic investment for businesses, the firm acknowledged that managing the associated payroll requirements can be challenging.

It said professional support can help businesses remain compliant while benefiting from the enthusiasm and fresh thinking that graduate hires can bring.