An HMRC review has found that some employers have incorrectly deducted a student or postgraduate loan amount from off-payroll workers.

In these instances, freelancers and contractors should account for their loans as part of their annual self-assessment tax return.

Loan deduction error

This all relates to off-payroll working and ‘new’ tax rules – IR35 – which apply to workers, freelancers and contractors who provide their services through their own limited company or another type of intermediary to a client.

Now, if the intermediary were not used, they would otherwise be an employee. As part of the government’s clampdown on ‘tax avoidance’ by these ‘disguised employees’, it brought in the IR35 rules for the public sector in 2017. These rules were then extended to the private and third sector last year.

The implementation of IR35 has been criticised and it seems there is still confusion about how it works. The latest uncertainty is based on how student and postgraduate loans should be deducted, based on whether an off-payroll worker is deemed as an employee or whether they’re determined as self-employed.

HMRC carried out a review and identified a small number of errors made by employers (client or organisation) in mistakenly deducting these loans as they are still familiarising themselves with the guidance and how to operate the rules.

If a contractor is deemed an employee under IR35, then only tax and National Insurance Contributions (NICs) should be deducted at source by an employer. The student or postgraduate loan should be accounted for via self-assessment.

If a worker is determined as self-employed, then tax, NICs and the student or postgraduate loan should be included via their self-assessment return.

What to do if you’re affected

Where HMRC spots these errors, it will prompt the employer to repay these sums via the next payroll cycle.

If that’s not possible, HMRC has a process in place to repay these amounts directly to the freelancer or contractor.

As such, these errors won’t lead to people overpaying their student loan. However, it’s worth checking to ensure the right deductions are being made by employers, organisations and clients in applying the IR35 rules to off-payroll workers.