What are the student loan thresholds for UK employers in 2026/27?

Navigating the complexities of student loans and payroll legislation is a critical task for finance and HR teams of growing businesses, particularly with the significant changes arriving in the 2026 tax year.

What is changing for student loan thresholds in 2026?

The 2026 tax year changes revolve primarily around the activation of Plan 5 repayments and adjustments to existing limits.

When do Plan 5 student loan repayments start?

April 2026 is the official start date for borrowers on Plan 5 to become liable for repayments. This scheme applies to students who started their course after 1st August 2023 and took out loans for maintenance or tuition fees.

Unlike previous reforms, this scheme introduces a lower repayment threshold of £25,000 per year. This figure converts to an income limit of £2,083 per month, or £480 per week.

HR and finance managers need to ensure their HR and payroll system can identify and process the new plan type identifier correctly when start notices (formally known as SL1 forms) begin to arrive from HMRC. These notices are the official instruction to begin deductions, and will explicitly state which plan the employee is on.

How will the Plan 2 student loan threshold change?

The Plan 2 student loan repayment threshold in 2026 will rise slightly more than 3 percentage points to £29,385 for the 2026/27 tax year, up from £28,470 in the 2025/26 tax year.

While there has been much discussion about freezing thresholds in the current fiscal climate, this specific increase provides a temporary adjustment before a confirmed freeze takes effect from 2027 to 2030.

Borrowers on this scheme, who generally started their studies between 2012 and 2023, will see their repayment interest shift upwards slightly based on RPI figures.

RPI stands for Retail Price Index. It is a measure of inflation used by the UK government to calculate the interest rate applied to loan balances, essentially tracking how the cost of living changes over time.

For Plan 2 loans, the interest rate is often set at RPI plus up to 3%, depending on the borrower’s income. However, for the new Plan 5, the interest rate is set at RPI only, meaning the value of the loan tracks inflation but does not grow in real terms.

How are the different student loan plans defined?

With five distinct repayment plans now in operation, it is essential for payroll teams to understand the criteria for each.

Which employees belong to which plan?

The following table summarises the key dates and criteria that determine which plan a student or employee falls under:

Why is correct identification important?

Identifying the correct plan is vital because each plan triggers a different threshold. For example, confusing a Plan 5 employee on a £25,000 threshold with a Plan 2 employee on a £29,385 threshold would result in a significant under-deduction of repayments. This would lead to compliance issues for the employer, and potential unexpected tax bills for the employee at the end of the year.

How are student loan calculations applied?

Payments are calculated as a percentage of the employee’s total gross earnings above the relevant threshold for their loan type.

What is the repayment rate for student loans?

The repayment rate is fixed at 9% for Plan 1, Plan 2, Plan 4, and the new Plan 5. If an employee earns £2,000 over the annual limit, they repay 9% of that specific £2,000, not their entire gross income.

Usually, the repayment amount is taken automatically from salary or wages paid through PAYE for employed staff.

However, accurate calculations are vital, as errors can result in an employee paying too much or too little tax and loan contributions, leading to administrative headaches further down the line.

How does unpaid leave affect the pay period for employees with outstanding student loans?

Unpaid leave affects calculations because the employer must apply the correct threshold for the actual interval the employee was paid for, rather than the standard pay period.

If an employee takes an unpaid leave of absence for a number of days within a pay period and their earnings drop below the threshold, no payment should be made for that specific month or week.

For instance, if someone is on leave for 10 days and their paid income for the month falls to £1,500, they are under the £2,448 threshold. Consequently, no student loan repayments are triggered for that period, protecting their net pay during a short month.

How do postgraduate student loans differ?

Postgraduate master’s loans differ because they operate under a separate framework, Plan 3, with a threshold of £21,000 and a rate of 6%, still frozen since the loan scheme was introduced in 2016.

It is important to consider that it is possible for an employee to have a postgraduate loan account alongside an undergraduate loan.

In this scenario, payments for both loans are taken simultaneously, meaning the employee could see a total payment of 15% on earnings above the respective limits.

Another important fact is that borrowers remain liable for their loan repayments even if they do not actually finish their course.

How do student loan calculations work in practice?

Student loan calculations work in practice by applying the relevant percentage rate to any earnings that exceed the threshold for that specific pay period.

What is a standard student loan deduction example?

A standard deduction example might involve calculating 9% of income that falls above the relevant threshold. So, to clarify how student loan deductions work, let us here consider two employed graduates on Plan 2:

• Graduate on a monthly wage: The employee is paid a monthly £3,000. The monthly threshold is £2,448 (calculated as the annual threshold of £29,385 divided by 12). The liable income is therefore £552. The repayment is 9% of £552, which is roughly £49. This repayment is taken directly from their pay before tax.

• Graduate on a weekly wage: If the employee earns £600 a week, and the threshold is £565 (calculated as the annual £29,385 divided by 52), they repay 9% of the £35 excess.

This calculation happens every pay period. If they work fewer days in a week and earn less than £565, they will not repay anything for that specific week.

How do irregular hours affect the student loan repayment calculation?

Irregular hours affect the calculation by causing the paid amount to fluctuate significantly between periods.

If an employee works fewer days in a week due to sickness or leave, their income might drop below the week or monthly threshold.

In this case, no deduction is taken for that specific period. However, if they work overtime the following week, they may pay a higher repayment amount, because the calculations are always based on the paid income in that specific period, not the annual average.

What are the UK student loan thresholds for 2026/27?

The confirmed thresholds for the 2026/27 tax year vary by loan type, and HR and finance teams need to be aware of both the annual and periodic limits.

What are the annual limits?

The annual limits determine the overall annual salary point at which HR and finance teams should begin deducting payments over the course of the tax year.

What are the periodic limits?

The periodic limits allow you to apply the correct threshold for each specific pay period to assist with calculations for Plan 5 and Plan 2. Here are the figures for the 2026/27 tax year, from April 2026:

Note: Always check the official www.gov.uk rates and thresholds for the final confirmed number.

What are the rules regarding student loan liability and interest?

Understanding when an employee becomes liable for student loan repayments loans is crucial for both compliance and for answering employee queries.

When does student loan liability begin?

Liability typically begins at the start of each term of their course. Even if they do not finish their course, they remain liable for the amount borrowed up to that point. This impacts the total balance they must repay.

How does the interest rate differ between plans?

Regarding interest, Plan 2 loans accrue interest at RPI plus up to 3%. In contrast, Plan 5 is set at RPI only, meaning no plus element is added. This difference will affect how quickly they can repay the balance.

This clearly demonstrates the financial advantage of Plan 5, which tracks RPI only, compared to Plan 2, which can be RPI plus 3%).

How does the borrowing term affect the total balance?

The borrowing term affects the total amount repaid by determining how long a borrower is liable for the loan before the balance is written off.

When will student loans be cancelled?

Student loans are eventually cancelled after a specific period, which is 40 years for Plan 5 and 30 years for Plan 2 and Plan 3.

If the loan is not repaid in full by the time they finish this term, the remaining balance is wiped. This extension to 40 years for Plan 5 means middle and lower earners will likely be repaying for a longer part of their working life compared to previous generations.

How is interest charged on student loans?

Interest is charged from the day the first payment is made, often tracking the Retail Price Index (RPI) to ensure the loan value remains consistent with inflation. For Plan 5, the interest rate is set at the RPI only, ensuring the value of the loan does not grow in real terms.

This contrasts with Plan 2, where interest serves as RPI plus an additional 3% depending on income. High earners often pay RPI plus 3%, while those with lower income might only be charged RPI plus 0%.

The government reviews RPI regularly. While employers don’t need to calculate the interest charged, employees will often ask why their balance hasn’t dropped despite making monthly repayments.

What are the employer responsibilities regarding student loan thresholds for data accuracy?

Employers play a vital role in the repayment collection system, acting as the intermediary between the student and the government.

How do I manage start and stop notices?

You will receive detailed information from HMRC in the form of SL1 (Start) and SL2 (Stop) notices. It is crucial for these to be applied promptly.

If you don’t apply a stop notice correctly, the employee will continue to be charged unnecessarily, requiring a refund later.

Conversely, missing a start notice means the employee falls behind on what they are repaying, potentially accruing more interest on their account.

How are off-payroll working and self assessment handled?

If you engage contractors who fall under off-payroll working rules (IR35), the employer is generally not responsible for processing student loan payments.

Instead, these off-payroll workers must handle their own obligations via self-assessment. They will therefore calculate what is due based on their total self-employed and other income when they file their tax return.

The self-assessment system calculates the total tax and loan liability annually. If a self employed person has a fluctuating income, they might repay more in a profitable year compared to a slow one.

Why is payroll automation essential for compliance?

Payroll automation is essential because manual calculations for multiple loan types increase the risk of error significantly.

How does automation reduce administrative burden?

Automation reduces administrative burden by instantly applying correct rates and thresholds, removing the need for constant vigilance over loan types. Tracking which employee is on which scheme is complex, especially when HMRC issues multiple start or stop notices.

A robust payroll compliance checklist can help teams stay organised, but manual entry is prone to mistakes. Automated solutions handle the new Plan 5 limits without the need for human intervention, ensuring the correct repayments are made every pay period.

How can software help with year-end transitions?

Software helps with new tax year transitions by automatically updating parameters as regulations evolve, reducing stress for finance and HR departments.

The transition between tax years is critical, and therefore ensuring your systems are updated before the first pay run is vital.

Modern automatic payroll data processing software will handle these legislative updates automatically, giving managers peace of mind that they are compliant with the latest UK legislation.

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