Employees who have a student loan need to declare this correctly in their tax code declaration. Student loan repayments depend on:
- how much an employee earns; and
- if it is their main (primary income) or secondary job.
Student loan repayments based on primary income
An employee must repay 12% of gross taxable earnings over the repayment threshold if they expect to earn more than $20,020 in a tax year. The repayment threshold depends on the employee's pay frequency. The threshold amount for the 2020/21 tax year is as follows:
|Pay Frequency||Threshold amount (before tax)|
For example, if an employee's gross taxable earnings (ie earning before tax) is $800 in a week, the student loan repayment for that week will be calculated at ($800 - $385) x 0.12 = $49.80.
N.B. Truncated taxable earnings are used when applying the calculation. For eg, if an employee's weekly earnings is $934.67, the student loan repayment for that week will be calculated at ($934 - $385) x 0.12 = $65.88. So, the cents in the employee's earnings are dropped off.
Multiple pay runs processed in the same pay period
There are 2 scenarios that you should be aware of when processing multiple pays for the same pay period:
Scenario 1: Threshold already applied in the original pay run
If an employee is paid more than once for the same pay period, and the threshold was applied in the original pay run, the threshold will not be applied again in any additional pay runs. This means that 100% of the employee's earnings (from the additional pay runs) will be used to calculate the student loan deduction. For example, say an employee was paid on a monthly basis - in the normal April pay run, ie pay period being 1 April to 30 April, an employee's taxable earnings was $2500. The student loan calculation for this pay run would be:
- $2500 - $1,668.33 = $831.67
- $831.67 x 12% = $99.80
If the employee was then paid again in a supplementary pay run was then processed (for a pay adjustment or bonuses for eg) using the exact pay period, ie 1 April to 30 April, but regardless of pay schedule used, the threshold will not be used again if the threshold was previously applied. Using the above employee to continue the example, the employee was paid an additional $1000 taxable earnings in the additional pay run. This means that the employee's student loan deduction for the extra pay run will be calculated at $1000 x 12% = $120.
Scenario 2: Threshold not applied in the original pay run
If an employee's taxable earnings in the original pay run is less than the threshold amount, there will be no student loan amount deducted. If, however, there is an extra pay for this employee for the exact same pay period and the sum of taxable earnings from the original pay run and extra pay run exceeds the threshold amount, then the combined earnings will be used to calculate the student loan deduction.
For example, an employee is paid on a weekly basis. In the original pay run, the employee has a taxable earnings amount of $300. This is less than the threshold amount and so no student loan will be deducted. A second pay is processed for this employee for the exact same period and his taxable earnings for this pay run is $300. The student loan amount is then calculated as follows:
- $300 (earnings from first pay run) + $300 (earnings from second pay run) = $600
- $600 - $385 = $215
- $215 x 12% = $25.80
N.B. If an additional/adhoc pay run is processed you must use the exact pay period dates that the pay run applies to. If you choose a pay period that is a few days out from the original pay period, the threshold will apply again. The date paid of the pay run does not determine whether the threshold is applied or not - rather, it is the pay period date as this is what the IRD use to determine the student loan amount required to be deducted.
Student loan repayments based on secondary income
If the employee is working for you as a secondary job, there will be no threshold applied when calculating the student loan deduction. This means that the employee must pay 12% on every dollar earned.
For example, if an employee's gross earnings (ie earning before tax) is $800 in a week, the student loan repayment for that week will be calculated at $800 x 0.12 = $96.
Special Deduction Rate
There are special circumstances where employees may be granted with a Special Deduction Rate, such as where the employee:
- has more than one job, including an income-tested benefit, student allowance or NZ Super;
- uses the SB SL or S SL tax code for their secondary job;
- earns less than the annual repayment threshold from their primary income.
Further information on special deduction rates can be found here.
There are two other extra deductions that can apply to student loan deductions. These are:
- SLCIR: a "Commissioner deduction" used for required additional student loan repayments. Inland Revenue Department (IRD) will advise you if additional deductions are to be made using SLCIR.
- SLBOR: a "Borrower deduction" used for voluntary additional student loan repayments. For SLBOR deductions, the employee will advise you if they wish to make additional payments to reduce their loan balance.
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