Following a request from a tax reform group, HMRC and the Department of Education have confirmed how the new basis period reform rules will affect student finance applications and student loan repayments for self-employed taxpayers.
Interaction Between Basis Period Reform & Student Loans
After a transitional period in the 2023/2024 tax year, basis period reform began at the start of the 2024/2025 tax year. This move means many unincorporated businesses and self-employed taxpayers will repay ‘transition profits’ over five tax years (2023/24, 2024/25, 2025/26, 2026/27 and 2027/28). Recently, HMRC confirmed these changes would impact student finance, and we’ll explain how in this article.
Student Finance
A maintenance loan helps with the day-to-day costs of being a student, like rent and food. The amount of maintenance loan a student can receive depends on a range of variables, including household income. HMRC has confirmed that any ‘transition profit’ should be included in the student finance applications as that information could reduce the amount family members are eligible to borrow.
If you are self-employed and are applying for student finance, such as a maintenance loan for your child, your income will be considered. Usually, the assessment is based on the tax year two years before the application, but you can choose to use the current year figure if you can show that your income has fallen by at least 15%. If, because of basis period reform, your reported income in 2023-24 is 15% or more lower than in 2021-22, you’d be better off using the current year amount for the student finance application.
Student Loan Repayments
Those who are self-employed and repaying their student loans will usually do so through their self-assessment tax returns (apart from when nearing the end of their repayments, at which point they’ll directly pay the Student Loans Company.) HMRC announced that basis period reform will affect student loan repayments as the ‘transition profit’ will be included alongside the ‘standard 12-month profit’ when determining whether an individual’s earnings meet the repayment threshold.
Those repaying their loans can elect to pay more in earlier tax years and lessen the costs later on, but it is not possible to postpone the amount due to a later tax year. If there is any remaining ‘transition profit’ following the election, this will be spread proportionally over the remaining tax years until 2027/28. In some circumstances, it may be possible to manipulate the spreading of your transitional profits so your income remains below the threshold for one or more of those years. Our expert team of accountants at Digital Tax Matters can help structure your applications and transitional profits to put you in the best possible financial position.
Navigating Student Finance & Basis Period Reform
Like many other financial areas during this transitional period, student finance has become increasingly challenging to navigate. As HMRC continue to alter how they operate, keeping up with the latest amendments isn’t easy. So, for assistance with your student finance applications and repayments or clarification on other areas affected by basis period reform, get in touch with the Digital Tax Matters team. With decades of industry experience, our accountants are expertly placed to answer any queries you have.