Life SituationsUpdated 2025

Self-Employment & Student Loans

A complete guide to how student loan repayments work when you're self-employed, a freelancer, or a contractor. Understand Self Assessment, payment dates, and how to manage your cash flow.

File By

31 Jan

online deadline

Pay By

31 Jan

balance + 1st POA

2nd Payment

31 Jul

second POA

Late Penalty

£100+

plus interest

ℹ️How Self-Employment Differs from PAYE

Unlike employees whose student loan is deducted automatically from each payslip, self-employed people pay their student loan through Self Assessment. This means: no automatic monthly deductions, your liability is calculated annually based on profits, and you need to manage cash flow to ensure you can pay when the bill arrives.

How Self Assessment Student Loan Repayments Work

When you file your Self Assessment tax return, HMRC automatically calculates your student loan repayment based on your taxable profits:

Calculate Your Taxable Profit

Total income minus allowable business expenses. This is your "net profit" for tax purposes.

Apply the Threshold

Student loan is only due on profits ABOVE the threshold (e.g., £28,470 for Plan 2 in 2024/25).

Calculate 9% (or 6%)

Your repayment is 9% of profits above the threshold (6% for postgraduate loans).

Add to Your Tax Bill

Student loan appears on your Self Assessment statement alongside income tax and National Insurance.

Pay by 31 January

The full amount is due by 31 January following the end of the tax year.

📝 Example: Freelance Designer

2024/25 Tax Year:

Gross income from clients: £52,000

Allowable expenses: £8,000

Taxable profit: £44,000

Student Loan Calculation (Plan 2):

Profit above threshold: £44,000 - £28,470 = £15,530

Repayment: £15,530 × 9% = £1,397.70

This £1,397.70 is due by 31 January 2026 (along with income tax and NI)

Payments on Account Explained

If your Self Assessment bill exceeds £1,000 AND less than 80% was collected at source (via PAYE), HMRC requires "Payments on Account", advance payments toward NEXT year's bill.

Payment	When Due	Amount	Purpose
Balancing Payment	31 January	Remainder of last year	Settles previous year
1st Payment on Account	31 January	50% of last year's bill	Advance for current year
2nd Payment on Account	31 July	50% of last year's bill	Advance for current year

📝 Payments on Account Example

Year 1 (2023/24):

Total Self Assessment bill: £5,000

Due 31 Jan 2025: £5,000 (balancing) + £2,500 (1st POA) = £7,500

Due 31 Jul 2025: £2,500 (2nd POA)

Year 2 (2024/25):

If actual bill is £6,000:

You've already paid £5,000 in POAs

Balancing payment: £1,000

New POAs: £3,000 each (50% of £6,000)

✅Reducing Payments on Account

If you expect your next year's income to be significantly LOWER, you can apply to reduce your Payments on Account. But be careful, if your estimate is too low, you'll owe interest on the underpayment.

Mixed Income: PAYE + Self-Employment

Many people have both employment income (PAYE) and self-employment income. Here's how student loan repayments work:

🎓How Combined Income is Handled

Your employer deducts student loan from your salary via PAYE
Self Assessment calculates total liability on COMBINED income
PAYE deductions are credited against your total liability
You pay the difference through Self Assessment

📝 Mixed Income Example

Sarah's Income:

Employment salary: £35,000 (PAYE)

Freelance profit: £15,000

Total income: £50,000

Student Loan Already Paid via PAYE:

9% × (£35,000 - £28,470) = £587.70

Total Liability on Combined Income:

9% × (£50,000 - £28,470) = £1,937.70

Amount due via Self Assessment: £1,937.70 - £587.70 = £1,350

Reducing Your Liability: Allowable Expenses

Your student loan is calculated on taxable profit, not gross income. Maximizing legitimate business expenses reduces both your tax AND student loan bill.

💰Common Allowable Expenses

Office rent or home office allowance
Equipment (laptop, phone, software)
Professional subscriptions and training
Accountancy fees
Travel for work (not commuting)
Marketing and advertising
Business insurance
Stationery and supplies

⚡NOT Allowable

Personal drawings or salary to yourself
Regular commuting costs
Clothing (unless uniform/costume)
Entertainment for clients (with some exceptions)
Fines and penalties
Personal portion of phone/internet bills

ℹ️Pension Contributions

Self-employed pension contributions (to a SIPP or personal pension) are deducted from your income for tax purposes, which ALSO reduces your student loan calculation. A £5,000 pension contribution saves you £450 in student loan repayments (9%) plus income tax relief!

Managing Cash Flow as Self-Employed

The biggest challenge for self-employed borrowers is cash flow, your tax and student loan bills arrive all at once, months after you earned the money.

Save 30% of Every Payment

Set aside roughly 30% of each client payment for tax, NI, and student loan. This varies by income level but 30% is a safe rule of thumb.

Use a Separate Tax Savings Account

Don't mix tax money with working capital. A dedicated savings account earns interest and removes the temptation to spend it.

Calculate Your Liability Quarterly

Don't wait until January to discover you owe £8,000. Track your income and estimate your liability throughout the year.

Budget for Payments on Account

After your first year, you'll pay 150% of your usual bill in January (balance + first POA). Plan for this cash flow hit.

Consider Monthly Voluntary Payments

You can make voluntary student loan payments to SLC during the year to spread the cost, though this is rarely the best use of money.

❌The First-Year Trap

In your first Self Assessment year, you only pay for that year. But in year two, you pay: the balance for year one + payments on account for year two. This can mean a bill 2-3x what you expect. Prepare for it!

Limited Company Directors

If you operate through a limited company, the rules are slightly different:

Salary Component

Processed through PAYE
Student loan deducted automatically
Based on monthly salary threshold
More predictable deductions

Dividend Component

NOT subject to student loan
Dividends are not "earned income"
Can be tax-efficient for student loan
Still subject to income tax

📝Tax Planning Opportunity

Taking a low salary (around £12,570) and the rest as dividends means minimal student loan repayments, since dividends don't count. However, consider the wider tax implications and pension contributions before optimizing purely for student loan.

Common Mistakes to Avoid

📊❌ Mistake 1: Not Registering for Self Assessment

If you earn over £1,000 from self-employment, you MUST register for Self Assessment, even if you have a PAYE job. Failing to register can result in penalties and interest on late payments.

📊❌ Mistake 2: Missing Deadlines

Paper returns: 31 October. Online: 31 January. Payment: 31 January. Miss these and you'll face automatic £100 penalty, plus interest, plus further penalties if still outstanding after 3 months.

📊❌ Mistake 3: Not Budgeting for Tax

Your clients pay you gross, no deductions. If you spend it all, you won't have money for your tax bill. Always set aside 25-35% immediately.

📊❌ Mistake 4: Forgetting Payments on Account

After your first year, January's bill includes an advance for next year. Many first-time self-employed are shocked by a bill that's 50% higher than expected.