In the UK, pensions can affect student loan repayments in two primary ways: when you contribute and when you start receiving pension income. This is because it can influence your taxable income. Contributing to your pension reduces your taxable income, which can lower your student loan repayments. Conversely, when you start receiving pension income, it can increase your taxable income. It's essential to recognise that not all pensions have the same impact, making it difficult to understand how they affect your student loan repayments and complicate any calculations you're trying to make. In this article, we'll delve into how student loans and pensions interact, impacting the amount you repay, and provide practical insights into what this means for you.

Do pension contributions reduce student loan repayments?

Depending on your pension type and how you contribute impacts your NICable income which is used to calculate your student loan repayments. Regardless of the pension type you are paying into, you will be contributing to it in one of two main ways: salary sacrifice and relief at source.

Salary Sacrifice Pensions: In the UK, a salary sacrifice pension scheme is the most common type of pension seen today. It is an arrangement between an employer and an employee to give up part of their salary or bonus in exchange for their employer making contributions to their pension scheme. This means the sacrificed amount is paid directly into the pension scheme before income tax and National Insurance contributions (NICs) are deducted. As a result, your overall income subject to National Insurance Contributions decreases. Since student loan payments are calculated based on NICable income, reducing this amount through salary sacrifice pension contributions will lower your student loan payments. If this is your type of pension then you should consider higher pension contributions to lower your monthly student loan repayments.

Relief at Source Pensions: Typically associated with a personal pension, defined contribution or money purchase pension, a "Relief at Source" pension works as follows: individuals contribute money to their pension from their take-home pay, which is the income they receive after taxes are deducted. Then, the pension provider adds extra money to the pension pot from HM Revenue & Customs (HMRC), typically equal to 20% (although this may be higher depending on the individual's tax band) of the amount the individual contributed. For instance, if someone contributes £80 to their pension, the provider receives an additional £20 from HMRC, resulting in a total of £100 in the pension pot. The significant difference here is the income that is subject to National Insurance (NI) contributions is higher. This means that relief at source pension contributions does not impact student loan repayments. If you think this is your type of pension then you should not consider pension contributions in your student loan repayment calculations.

Both types of contributions lower your taxable income, but only salary sacrifice pension contributions directly reduce NICable income, which reduces your obligated student loan payments. If you are unsure and have an employer then you are almost certainly on a salary sacrifice scheme and they will be able to help you better understand your particular scheme. Otherwise, if you are the boss then you are more likely to be on the relief at source track.

This seems to be a fast-evolving space, especially with personal pensions. There appear to be large gaps in the available information on this topic and we realise this can be extremely frustrating when you are trying to do a self-assessment. If you have any questions, or you want to get clarification on specific topics please reach out to us and we will try and answer your questions. You can find our details on the Contact Us page.

When you receive your pension

Student loan repayments are typically deducted from income that is subject to Class 1 National Insurance Contributions (NICs). Therefore, if your pension income does not undergo NIC deductions, it should not be subjected to student loan deductions. However, if you are obligated to file a tax return and your total income exceeds £2,000, you may be liable for student loan repayments.

By default, pensions do not incur student loan deductions. Nevertheless, if you are mandated to submit a tax return and your overall income surpasses specific thresholds, you may find yourself required to make student loan repayments.

What does this mean for student loan repayments?

Pension contributions can be a nifty way to lower your student loan repayments while increasing your pension pot. This is largely good and should be exploited if you can, however it doesn't mean you should be ramping up your contributions to sky-high levels. Mainly because this will leave you less each month from your paycheck for today, but also because your employer only matches up to so much (company specific). It is also worth remembering that if you are scheduled to pay back your loan before it is wiped you may want to pay back your loan quicker to lower interest accruals. If you plan to increase your pension contributions to lower your monthly payments, it is important to be reasonably sure that you will not have to repay your loan in the future. We cover this in more depth in our Student Finance Guide, where we explain why paying less towards your monthly repayments does not always mean paying less overall.

Why not try our FREE Student Finance Calculator and see how pension contributions can impact your student loan repayments?