Why does self assessment profit differ from student loan repayment calculations? Help

[Pyjamatimenow]

Just wondered if anyone can shed any light on this? I have a wage but fill in a self assessment because I have a rental property. I used an accountant because I was finding it stressful to deal with the tax side of things. The tax bill came back pretty low at around 800 because the property hadn’t been let for some of the year and there was quite a lot of expenses from a bad tenant I’d had in. However I then got a letter saying there had been an adjustment and I owed an additional 1200. I had been expecting an extra bill because I knew the property income would push me over the threshold for my student loan replacement to kick in but wasn’t expecting it to be that much as my wage was just under the threshold and the property income was only around 3500 that year, After quite a few calls to HMRC I managed to glean that the self assessment tax have acknowledged deductions from the profit ( expenses and interest) the student loan side of things doesn’t. They have taken the profit to be the amount before the deductions. I can’t seem to get a straight answer as to why this is.

Surely it's that you have paid tax on your employment through PAYE and so just a small amount is due on your rental income. When it comes to your student loan, the rental income has tipped your whole income combined over the threshold and so the amount due is based on your employment and your rental combined.

Bizarrely though if you have one job earning £40k per year you'd pay the 9% student loan on anything above the threshold (£28/29k-ish) but if you have another job for £10k per year you don't get charged student loan deductions on it. I think if you have to fill in self assessment though, they would charge you for the 9% between the £28k-£50k

If you’re employed and have more than one employer
You’ll only make repayments from jobs where you’re paid over the threshold for your plan type, not your combined income.
Example
You have a Plan 1 loan and you have 2 jobs. Before tax and other deductions, you’re paid £1,000 a month from one job and £800 a month for the other.
You will not have to make repayments because neither salary is above the £2,241 a month threshold.
Example
You have a Plan 2 loan and you have 2 jobs. Before tax and other deductions, you’re paid £2,500 a month from one job and £500 a month for the other.
You will only make repayments on the income from the job that pays you £2,500 a month because it’s above the £2,448 threshold.
If you’re self-employed or complete a Self Assessment tax return for another reason
HM Revenue and Customs (HMRC) will work out how much you repay each year from your Self Assessment tax return. Your repayments will be based on your income for the whole year.
If you’re also employed
How much you repay depends on your combined income for the whole year.
Example
You have a Plan 1 loan and you’re both employed and self-employed. You have an income of £32,000 a year from your self-employment and £10,000 a year from a job with an employer.
Your Self Assessment tax return will show that your combined income is £42,000. This is over the yearly threshold for Plan 1.
Calculation:
£42,000 - £26,900 (your income minus the Plan 1 threshold) = £15,100
9% of £15,100 = £1,359
This means the amount you’d repay each year would be £1,359.
If you’ve already made repayments from a salary, HMRC will deduct them from the amount you have to repay.

Student loans are also don't don't take into account reductions to your salary from paying into a pension like income tax does. It's a stupid system and I think you could get around paying student loans entirely earning £50k per year if you could find employment with 2 separate employers both paying you £25k because they're both individually under the threshold. But if you work one job for £50k or have any self employment or rent you'll pay the full 9% on anything above the threshold

thats not true from my experience. I did a small amount of tutoring through an agency and they’ve put that with my wage from my other job.

Yes but what I’m saying is that the student loan dept are not calculating my rental income in the same way that the tax is being calculated and I don’t understand why

Because they don't treat student loan deductions the same as income tax
Like I say even in normal employment, things like pension deductions will reduce income tax but they don't reduce student loan contributions they use the gross income before deductions to calculate the student loan contributions

Only because you've completed self assessment

But surely pension deductions aren’t the same as deductions for expenses on property etc? The profit should be the same as what’s calculated for tax purposes

I'm not saying it makes sense. Most of the student loan repayment rules don't. Here is the link for the rental income side of things. You'll notice it refers to total income. Not income minus expenses.

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4476

My accountant seems to be equally baffled by it. Thank you for that link. Hadn’t seen that before

Property expenses should reduce the "income", interest doesn't - you get a tax deduction of 20% of the interest after the tax in calculated on the property income.

Is interest the issue here?

yes it seems it is. The interest makes about a 6000 difference to the income. So HMRC are seeing my income from property as about 4000 and student loan company about 10000 because they don’t allow the interest.

HMRC aren't assessing your interest at £4,000 - they are assessing at £10,000 and then you get a 20% tax credit for the interest against the tax due.
The net effect on you is that you feel like you are being taxed on the £4k.
If you were higher rate and the income was taxed at 40% you would still only get the 20% tax credit.

It is a massive problem for landlords with highly geared portfolios as they can owe tax despite not having any real positive cash flow from the property.

The property income less allowable expenses (agent fees, repairs etc) is the profit that goes into your tax calculation and is used to assess your gross income for both tax and student loan purposes.

The interest then gives you a credit against the tax you owe as calculated on the gross income.

There is no such credit for student loans.

Probably the mortgage/loan interest. It's not a deduction from income in the same way as other costs such as repairs or insurance. It's a "tax reducer", in that income tax is calculated on the profits before mortgage interest, but then 20% relief on the income tax figure is deducted from the tax bill. For student loans, it's gross income (with no deduction for interest) that student loan repayments are based on. If you have significant interest costs, the student loan could well amount to several hundred pounds or more.

If your "accountant" is baffled by it you need a new one. This is basic stuff and anyone charging for the service should know it. Are they actually qualified??