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I am nearing the end of my repaying my student loan. As standard, repayments are made using HMRC's PAYE system at a fixed, income-dependent rate. However, since HMRC only informs the Student Loans Company how much has been collected at the end of the tax year it is possible to overpay. To avoid this, I can opt to switch to Direct Debit repayment where SLC manage the payments which are taken from my bank account.

Speaking to a customer services agent, I was told that some people (accountants were mentioned!) prefer to keep paying by PAYE for as long as possible for tax reasons. However, it was not at all clear to me what tax advantages, if any, there are to having my employer make the deduction from my monthly pay rather than making the payments by Direct Debit. If the PAYE deductions were made pre-tax then it would make sense, but I don't think they are. Or are they?

  • I believe you can only switch to Direct Debit in the final year of your loan, isn't it ? – DumbCoder Jan 18 '17 at 17:12
  • Roughly the last 1 or 2 years I think. They sent me a letter to say I was now eligible. – howecome Jan 20 '17 at 10:11
  • If you have both a Plan 1 and a Plan 2 loan you can’t change to direct debit repayments until one type of loan has been paid off in full. Once you have paid off one plan type you can then change to direct debit repayments in the last two years of the remaining loan. – hana Nov 20 '17 at 9:15
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As I thought, there is no tax benefit of paying by PAYE, confirmed today by another customer services advisor at Students Loans Company. The original advisor was talking rubbish!

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I had this discussion with someone at SLC. They were adamant PAYE deductions are made pre-tax yet they were unaware of a tax benefit compared to paying by direct debit. I explained why, if PAYE was pre-tax, there would be a benefit and it seemed new to him. He then spoke to one of his colleagues who was adamant there was no tax benefit to it, but was also adamant PAYE deductions were pre-tax - which doesn't make sense to me. If it was pre-tax, it would create a tax benefit.

The only way I've been able to make sense of this is to think of the student loan payment as a tax itself, rather than thinking of it pre or post tax.

Tax (income tax and national insurance) is always deducted from the total of your gross pay - whether or not you have a student loan. That doesn't change whilst making student loan payments and shouldn't change after you finish student loan payments, your income tax and national insurance should be the same in relation to your gross pay.

So, if you think of the student loan payment as a tax itself, it means it doesn't have to be taxed, because you don't get income tax on your national insurance deduction amount - you just have income tax off your gross pay and then national insurance off your gross pay. You don't calculate income tax off your national insurance payment and vice versa, so you wouldn't calculate additional income tax or national insurance off your student loan payment either. That's why they refer to it as being "pre-tax" or they say it's not taxed. But you have to think of it being applied to your gross pay at the same time, alongside tax, or as if it was metaphorically a tax itself - not thinking about it being taken before or after tax.

The proof will be in the pudding in January when I get my first pay slip without a SLC deduction. My net pay has to increase because I'm no longer having those deductions from my pay. If my net pay goes up by the exact amount that I used to lose to the SLC PAYE deduction, then the above theory is right that you should think of the SLC payments as a metaphorical tax themselves rather than before or after tax. If my net pay only goes up by 68% of what I used to pay for SLC PAYE deduction, then my previous theory that SLC deductions are taken pre-tax was correct. If my net pay goes up by any other amount, then I'll pull my hair out!

  • Student loan deductions are calculated on your "taxable income" (which is more or less the same as "pre-tax pay" or "gross pay"). The amount of tax and NI you pay is also calculated on your "taxable income". There is therefore no tax benefit to PAYE vs direct debit. Thinking of student loan deductions as a tax is a fair analogy, but of course once you've paid off your loan the "student tax" stops. Basically, I'm agreeing with your answer, but your wording is horrendously complicated and confusing so I'm summarising. – AndyT Nov 22 '17 at 12:00

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