How does student loan payroll work in the UK?

From April 2026, UK employers face a significant change in student loan payroll: Plan 5 becomes operational. This new scheme applies to graduates who started university in August 2023 or later and features the lowest repayment threshold of any undergraduate plan at just £25,000. With 1.5 million students taking out loans annually and payroll teams now managing five active loan plans, getting deductions right has never been more critical.

Below, we explain how student loan deductions work, when they start and stop, and what you need to know to manage Plan 5 alongside existing schemes.

How are student loan repayments processed through the UK payroll?

Within UK payroll, a student loan refers to repayments made towards a loan used to finance higher education. These repayments are automatically deducted from an employee’s salary through the PAYE (Pay As You Earn) system. Employers are normally responsible for calculating and applying the correct student loan deductions each pay period, based on the employee’s earnings and loan plan, and reporting these amounts to HMRC. These deductions are not optional, as they must be applied when instructed by HMRC, typically via a start notice.

Student loan repayments are only taken once an employee’s income exceeds a specific threshold, and the amount deducted is calculated as a percentage of earnings above that threshold. While interest may be applied to personal student loans, this is managed by the Student Loans Company and does not affect how employers calculate payroll deductions.

What is a student loan deduction from payroll?

A student loan deduction from payroll is the amount an employer must withhold from an employee’s salary to repay their student loan through the PAYE system. The amount deducted is a fixed percentage of earnings above that threshold, which varies depending on the employee’s student loan plan.

For the 2026/27 tax year (starting 6 April 2026), the Plan 1 student loan annual repayment threshold is expected to rise to £26,900. Employees will need to repay 9% of any income above this amount. Therefore, if an employee earns £28,000 per year, they would repay 9% of £1,100 (the amount above the threshold), equating to £99 annually.

Once applied, the deducted amounts must be reported to HMRC as part of regular payroll submissions. Loan deductions are taken automatically alongside tax and National Insurance, making them a key part of managing payroll and ensuring compliance. If income falls below this threshold, no repayments are required.

How are student loan repayments collected through PAYE?

Student loan repayments in the UK are collected automatically through the PAYE (Pay As You Earn) system, alongside Income Tax and National Insurance contributions. Unlike some other types of loans, there is no fixed or average monthly student loan payment in the UK.

Repayments are entirely based on an employee’s earnings and are calculated as a percentage of income above a specific threshold. The amount deducted can change from one pay period to another, rather than remaining a set figure. This is particularly relevant for employees with variable pay, bonuses, or overtime. 

When should employers start and stop student loan deductions?

Employers must start and stop student loan deductions based on instructions from HMRC. In most cases, deductions begin when an employer receives a start notice (SL1), indicating that an employee has reached the repayment stage.

Deductions should continue automatically through payroll until HMRC issues a stop notice (SL2) or the employee meets specific criteria to stop repayments. It’s important that employers follow these instructions carefully to avoid incorrect deductions.

When do employers receive an SL1 start notice?

Employers receive an SL1 start notice from HMRC when an employee becomes liable to repay their student loan. This typically happens once the employee’s income exceeds the relevant repayment threshold and HMRC identifies that deductions should begin. For example, an employee earning £30,000 per year would be above the Plan 2 threshold of £29,385 from April 2026, prompting HMRC to issue an SL1 notice shortly after the employee’s first payslip is processed, so deductions can begin through payroll. The SL1 notice is usually issued through payroll software or HMRC’s online services, such as PAYE Online. It includes key information such as the employee’s student loan plan type.

Once received, employers must begin deductions from the next available payroll run, following HMRC guidance. In some cases, employees may inform their employer that they have a student loan. However, employers should not start deducting student loan payments based on this alone.

When should deductions stop (SL2 or employee notification)?

Employers should stop student loan deductions only when instructed by HMRC or in specific, limited circumstances. In most cases, deductions must continue until an official stop notice (SL2) is received, confirming that repayments should end.

The SL2 notice is issued by HMRC when an employee has either fully repaid their loan or no longer needs to make deductions through payroll. Once received, employers must stop deductions from the next available payroll run. Deductions should only be stopped based on an official SL2 notice, unless HMRC guidance explicitly allows otherwise.

What are the different student loan plans in the UK?

There are five main student loan plans in the UK, including Plan 1, Plan 2, Plan 4, Plan 5, and Postgraduate loans. Each plan has different repayment thresholds and rules, which determine how much is deducted from an employee’s salary through payroll. 

💡 Important: Plan 5 launches in April 2026

Plan 5 is the newest student loan plan and applies to students from England who began their university course on or after 1 August 2023. From April 2026, these borrowers become liable for repayments, and employers will start receiving SL1 start notices from HMRC to begin deductions.Key features of Plan 5 include:

• Lowest threshold: At £25,000 per year, Plan 5 has the lowest repayment threshold of all undergraduate plans, meaning graduates start repaying earlier

• 9% deduction rate: The same percentage as Plans 1, 2, and 4

• Default plan: Plan 5 is now the standard for all new students starting university in England from August 2023 onwards.

Employers should ensure their payroll systems are configured to handle Plan 5 deductions from April 2026.

How do employers identify an employee’s loan plan?

Employers identify an employee’s student loan plan primarily through information provided by HMRC and the employee’s starter details. In most cases, the correct plan is confirmed via an SL1 start notice. If an SL1 notice has not yet been received, employers may need to rely on the employee’s starter checklist (previously known as the P46). This includes a question asking whether the employee has a student loan and, if so, which type. Based on this, employers can apply provisional deductions until HMRC provides confirmation. It’s important to note that employees may not always know their exact loan plan. For this reason, employers should treat HMRC notifications as the authoritative source and update payroll records accordingly.

How do undergraduate and postgraduate student loans differ?

Undergraduate and postgraduate student loans differ mainly in how they are structured and how repayments are applied through payroll. Indeed, undergraduate student loans include Plan 1, Plan 2, Plan 4, and Plan 5, and are repaid at a fixed percentage of income above a specific threshold. For example, under Plan 2, employees repay 9% of anything they earn above the repayment threshold.

From April 2026, this threshold is set to change to £29,385 per year (£2,448 per month). An employee earning £32,000 annually would therefore repay 9% of £2,615 (the amount above the threshold), which equals £235.35 per year, deducted through payroll. If the employee receives a bonus, such as £2,000, this is also included in the calculation for that pay period, which may increase the deduction temporarily. In some cases, if too much is deducted due to fluctuating earnings or payroll errors, the employee can request a refund from the Student Loans Company (SLC).

On the other hand, postgraduate loans are typically repaid at 6% of income above £21,000 per year, meaning an employee earning £25,000 would repay 6% of £4,000.

The key difference for employers is how deductions are calculated and applied. If an employee has only an undergraduate loan, a single deduction is made based on their plan. However, if they also have a postgraduate loan, both deductions must be applied at the same time through payroll. This means that in some cases, employees may have multiple student loan deductions taken from their salary in the same pay period. Employers must ensure that each loan type is calculated separately and correctly, in line with HMRC guidance.

How are student loan deductions calculated in payroll?

Student loan deductions are calculated automatically through payroll based on an employee’s earnings, loan plan, and HMRC rules. While the process follows a standard structure, it requires accurate data and correct setup to ensure deductions are applied correctly. It’s essential to ensure that payroll systems correctly interpret thresholds, apply the right percentage, and reflect deductions clearly in employee payslips.

How does a student loan appear on a payslip?

In general, student loan deductions appear on an employee’s payslip as a separate line item, typically labelled as “Student Loan” or “Student Loan Repayment”. This deduction is shown alongside other statutory payroll deductions such as Income Tax and National Insurance, making it clear how much has been withheld during that pay period. The amount displayed reflects only the repayment for that specific period, not the total loan balance. It’s important that payslips are clear and accurate, as employees often rely on them to understand their deductions.

How do you calculate deductions based on earnings?

Student loan deductions are calculated by applying a percentage rate to the portion of an employee’s earnings that exceeds the relevant repayment threshold.

In practice, this involves:

• Identifying the employee’s student loan plan

• Determining their earnings for the pay period

• Applying the correct threshold

• Calculating the percentage on the amount above that threshold

While it is possible to calculate deductions manually, most employers rely on payroll software to automate the process. Payroll systems are designed to apply the correct thresholds and rates and update calculations in line with HMRC changes.

What are the main employer responsibilities for student loan payroll?

Employers are responsible for ensuring that student loan deductions are applied accurately and in line with HMRC requirements. This includes identifying when deductions should begin, applying the correct loan plan, and ensuring that calculations are carried out correctly through payroll.

What must employers report to HMRC?

Employers must report student loan deductions to HMRC as part of their regular payroll submissions, typically through Real Time Information (RTI). Each pay period, the amount deducted from an employee’s salary must be included in the Full Payment Submission (FPS), along with other payroll information such as tax and National Insurance contributions. This ensures that HMRC can track repayments and update the employee’s student loan balance accordingly.

What are the risks of incorrect deductions?

Incorrect student loan deductions can lead to a range of issues for both employers and employees. Under-deductions may result in outstanding repayments that need to be recovered later, while over-deductions can impact employee pay and require refunds or adjustments. These mistakes can lead to additional administrative work, employee queries, and potential compliance concerns.

What are the most common student loan payroll mistakes to avoid?

Most mistakes generally arise from incorrect setup, missed HMRC notices, or misunderstanding how deductions should be applied. Ensuring that student loan deductions are handled correctly from the start helps avoid the need for adjustments later.

What errors occur when applying thresholds and plans?

One of the most common mistakes is applying the wrong student loan plan, which can result in incorrect deduction rates being used. This often happens when employee information is incomplete or when HMRC notices are not processed correctly.

Another frequent issue is misunderstanding how thresholds work. Deductions should only be applied to earnings above the relevant threshold, but errors can occur if employers apply the percentage to total earnings instead.

Timing errors can also arise, such as starting deductions before receiving an SL1 notice or failing to stop them after an SL2 notice. 

How can employers ensure compliance and accuracy?

Key best practices include:

• Following HMRC notices carefully, making sure deductions start and stop at the correct time

• Applying the correct student loan plan based on HMRC information

• Using payroll solutions to automate calculations and updates

• Regularly reviewing employee data to confirm it is accurate and up to date

• Ensuring deductions are reported correctly through RTI submissions

• Providing clear payslips so employees can understand their deductions
  
  

Managing student loan payroll in the UK requires a clear understanding of when deductions should start and stop, how they are calculated, and the different loan plans that may apply. From April 2026, with Plan 5 now operational, employers must be particularly vigilant about applying the correct plan to avoid errors.

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