The overpayments affected sole traders and employees who earned more than £100,000, HMRC has confirmed, and it is now writing to 16,000 graduates advising them that they will be repaid through their student loan accounts.

The problem went on for seven years between 2016 and 2023, which meant £1.6m was taken from 16,000 working graduates. This worked out at an average overpayment of £104 each.

The affected sole traders claimed benefits in kind such as company cars, fuel or medical insurance, which are treated as a taxable benefit outside of standard salary payments and are liable for National Insurance contributions (NICs) depending on the nature of the benefit.

HMRC said that its payroll software should have excluded benefits which were not liable for NICs but they were included in student loan calculations. It has now put in a temporary fix to resolve the issue and will be updating the payroll software to ensure this does not recur.

Student loans are repaid via the tax system and repayments are not a deductible expense for tax purposes. An annual statement is sent out each April detailing the loan balance, interest charged and any repayments made.