Got a student loan? Bizarrely, working extra shifts or getting a bonus this Christmas could COST you cash
Many people may be hoping to earn a bit more cash over the Xmas period. You might be getting triple pay for working on Christmas Day, getting cash for covering shifts of those who want time off or – if you're lucky – simply receiving a nice bonus from your employer. Bizarrely though, if you're a student loan borrower, a festive spike in your income could actually leave you with less money in your pocket...
The reason for this fiscally illogical quirk is the way that student loan repayments are calculated. People who took out a student loan from 1998 onwards make repayments based on how much they earn – for most, the cash comes straight out of their salary via a system called PAYE (pay as you earn) alongside income tax and national insurance.
The way repayments work is you pay 9% on everything you earn over a set threshold. There are two annual thresholds at which repayments start:
- If you started uni in or after 2012 and are from England or Wales, you're a 'Plan 2' borrower and you make repayments if you earn £25,000+/yr.
- If you started before 2012 – or since and you're from Scotland or Northern Ireland – you're a 'Plan 1' borrower and you make repayments if you earn £18,330+/yr.
However, what really counts is how often you're paid. If it's every month, your annual threshold is divided by 12 – so Plan 2 borrowers, for example, will pay 9% of the total amount they earn in a month over and above £2,083.33. The same principle applies if you're paid weekly or at another interval.
If you have to pay off your student loan in one particular month because you've earned more – say, by doing extra shifts – you're able to reclaim this, if, by the end of the financial year, the overall amount you've earned is below the annual threshold. (There's full help on how to reclaim in our Student Loan Overpayments guide.)
But here's the quirk:
If your annual salary's even 1p over the threshold, you can't reclaim ANY cash.
So bizarrely, in some cases if you work more you could end up with less take-home pay. Here's how that works in practice...
Brace yourselves – here's the boring maths bit
To give you an example of how the system can make working extra shifts or getting a Christmas bonus a curse rather than a blessing, let's imagine I'm a student from England who went to university between 2013 and 2016.
I'm a 'Plan 2' borrower, so my annual repayment threshold is £25,000. I earn £24,000/yr (so £2,000/mth before tax) in my job as an IT consultant, and so usually I don't have to worry about paying back my student loan. Happy days – sorry Student Loans Company.
Now let's look at two different scenarios over the Christmas period.
- In scenario one I absolutely smash the extra shifts. Loads of companies are finding their IT software's kaput over Christmas, and I'm needed to work on Christmas Day, Boxing Day etc to save everyone's bacon. I rake in the overtime payments and also get a huge bonus from my boss for generally being an all-round legend, meaning my pay before tax in December is £3,020!
Unfortunately, this pushes me over the £2,083.33 monthly repayment threshold, by £936.67. I pay back 9% on this, so £84.30, via PAYE.
Assuming I don't do any extra shifts in the coming months, by the end of the financial year in April I can see I've earned £25,020 over the past year. Logically, you might think I should have only paid 9% of the amount I've earned over the £25,000 annual threshold towards my loan... so £1.80. But I paid £84.30 at Christmas because of the extra shifts, and because I earned over the annual threshold – albeit only by £20 – I can't claim ANYTHING back.
- In scenario two, I earn £20 less – but end up £60 better off... Again I do a lot of extra shifts over Christmas. Again, loads of companies find their IT software's broken, and I'm needed to work over the Christmas break. But one day I've had enough and leave a little earlier than in scenario one.
My boss is still pretty chuffed and I've worked up a decent chunk of overtime, but I get a slightly smaller monthly salary than in the first scenario – let's say, er, £2,999.99. I pay 9% on the amount over the £2,083.33 monthly repayment threshold, so £82.50.
However, assuming again I do no more extra shifts, by April I've earned £24,999.99 over the entire financial year. Unlike in the scenario above, I'm below the annual repayment threshold, so can claim my £82.50 student loan repayment back.
So, strange as it sounds...
I've ended up working LESS and earning LESS... but with MORE cash in my pocket at the end of the financial year.
But even if I'm worse off in the first scenario, at least I'm repaying my loan, right?
This seems the logical response to the maths outlined above, but in practice, it doesn't fully wash.
As Martin explains in his Should I repay my student loan? guide, student loans are unlike any other form of borrowing. Repayments operate far more like a tax than a debt – so in reality, it's often better having the cash in your pocket.
With interest rates for those who started uni in or after 2012 as high as 6.3%, you might assume repaying early is a boon. Yet the stats show the huge majority (over 80%) of these university leavers are unlikely to clear their loan in full in the 30 years before it's wiped – so paying money towards the loan when you don't need to is essentially wasting cash.
For those who started university before that, as the amount borrowed and the interest rates are lower, you are more likely to clear all the debt before the loan's wiped. But even then, with interest rates much lower, it's arguable you're better off with the cash in your pocket now.
OK, so I get the problem – but what can I do about it?
That's the million-dollar (or maybe £60) question.
Let's be honest, this is a fairly niche issue. We ran our figures by the Student Loans Company and it agreed we were correct, but pointed out it's not a problem likely to affect a huge number of people.
If you're one of the few it does catch, well... your options are limited. In reality, unless you're a maths genius, it's probably quite hard to walk the right side of the fine line to make sure you don't lose out. Even if you could, you can't always dictate exactly what shifts you do.
If you work in a small company though, it might be worth chatting to your boss about exactly what bonus he or she gives you, if it might push you over the threshold.
And if nothing else, at least thanks to the number crunching above you can explain to anyone who'll listen why sometimes it DOESN'T pay to work more over Christmas.