When you become a company director, you leave behind the world of PAYE student loan deductions. But the debt doesn't disappear. Instead, it moves to your Self Assessment Tax Return.
A critical misunderstanding is that Student Loan repayments are only calculated on Salary. In reality, HMRC calculates repayments based on your Total Adjusted Net Income. This means Dividends are fully liable.
If you take a low salary (£12,570) and high dividends (£40,000), your Student Loan repayment will be calculated on the total £52,570.
Knowing your Plan Type is essential. The thresholds determine when the 9% tax kicks in.
| Plan Type | Annual Threshold | Rate | Who is this? | | :--- | :--- | :--- | :--- | | Plan 1 | £24,990 | 9% | Pre-2012 students (UK/Wales/NI). | | Plan 2 | £27,295 | 9% | Post-2012 students (England/Wales). | | Plan 4 | £31,395 | 9% | Scottish students. | | Plan 5 | £25,000 | 9% | New students (started after Aug 2023). | | Postgraduate | £21,000 | 6% | Masters/MBA students. |
Note: You can have a Plan 2 AND a Postgraduate loan simultaneously. The deductions stack (15% total marginal rate).
HMRC does not look at Salary and Dividends separately. They treat income as a single bucket.
Formula:
(Total Income - Threshold) * 9% = Annual Repayment
The Mistake: Sarah assumes repayment is only on salary. Since £12,570 is below the £27,295 threshold, she thinks she pays £0. The Reality:
Result: Sarah gets a tax bill in January for £1,824.75 she didn't save for.
There is a nuanced rule for "Unearned Income" (Dividends/Interest) in Self Assessment.
Employer Pension Contributions are NOT income.
If you don't need the cash, don't declare the dividend. Leave the profit in the company. Your income stays lower, and your Student Loan liability drops.
Postgraduate loans are particularly painful for directors because the threshold is lower (£21,000) and it stacks.
Example: Plan 2 + Postgraduate
Disclaimer: Voluntary prepayments to SLC do not reduce the compulsory amount calculated by Self Assessment.