The Employer's Guide to Student Loan Deductions

If you employ anyone who attended university or took out a postgraduate loan, you need to handle student loan deductions through payroll. As a UK employer, student loan deductions are a mandatory obligation — similar to tax and National Insurance — and HMRC will notify you when to start. The process isn't complicated, but it does require attention to which loan plan the employee is on, what the annual threshold is, and whether you're reporting correctly. This guide walks you through the five loan plans, how to calculate deductions, and what you actually need to do each pay period.

How student loan repayments work

Student loans in the UK are repaid in two ways: direct payments (if the employee chooses to pay early) and payroll deductions (which are automatic once they're earning above the threshold). You, as an employer, only deal with the payroll deduction bit — HMRC collects the deduction through your PAYE submissions and sends it to the Student Loans Company.

The mechanism is straightforward. When an employee's earnings exceed a specific threshold each pay period, you deduct a percentage of the amount above that threshold. That deduction leaves their payslip, gets bundled into your PAYE payment to HMRC, and HMRC forwards it to the Student Loans Company. The threshold and the deduction rate (usually 9% or 6%) depend on which loan plan the employee is on — and there are now five plans in operation, which can get a bit tangled.

The five loan plans: Plan 1, Plan 2, Plan 4, Plan 5, and Postgraduate

Each plan has its own threshold and rate. Check the Student Loans Company guidance or your payroll software for current-year thresholds, as they change annually.

Plan 1 covers loans taken out before September 2012 in England and Wales, plus all loans from Scottish Student Awards and Northern Irish Student Finance. The rate is 9% of earnings above the threshold.

Plan 2 covers loans taken out from September 2012 onwards in England and Wales (the most common plan for recent graduates). Also 9%, different threshold from Plan 1.

Plan 4 covers Scottish student loans issued from April 2021 onwards, replacing Plan 1 for Scottish students starting courses from 2021. Same 9% rate, separate threshold.

Plan 5, the newest, covers loans taken out from September 2023 onwards in England. You'll see more of these as time goes on. Still 9%, but with the highest threshold of the undergraduate plans.

Postgraduate Loan is separate — it's for master's and doctoral study, and the rate is 6% of earnings above threshold. Crucially, an employee can be on both an undergraduate plan and a postgraduate plan at the same time. If they are, you make two separate deductions in the same pay period: one at 9% for the undergraduate loan, one at 6% for the postgraduate.

The thresholds differ between plans by design — later plans have higher thresholds, reflecting changes to loan policy. It's not random; it's deliberate. But it does mean you can't just use one threshold for everyone.

When to start and stop deductions

HMRC will tell you to start making deductions in one of two ways:

1. A start notice (SL1), sent through your payroll software or by post. This tells you the loan plan type, the effective date, and to begin deducting.
2. A new starter declaration from the employee themselves. When someone joins without a P45 and completes a starter form, one question asks if they have a student loan. If they say yes, you start deductions based on the plan they declare.

Do not start deductions on your own initiative. Even if you know someone went to university, you cannot deduct without one of these two triggers. Similarly, do not stop deducting when the employee tells you the loan is paid off. Continue until HMRC sends you a stop notice (SL2). If there's an overpayment, the Student Loans Company refunds the employee directly — that's not your problem.

Once you know which plan the employee is on and the deduction starts, the next step is calculation. And that's where payroll software saves you from a spreadsheet.

Calculating the deduction

The formula is simple. For each pay period:

1. Take the employee's gross earnings (after pension deductions if you use net pay arrangement, but before tax and National Insurance).
2. Convert the annual threshold to a per-period figure: divide by 12 for monthly, 52 for weekly, 26 for fortnightly, 4 for four-weekly.
3. If earnings exceed the threshold, multiply the excess by the rate (9% or 6%).
4. Round down to the nearest penny.

Worked example: An employee is on Plan 2. The annual threshold is £27,295. They earn £2,800 per month.

• Monthly threshold: £27,295 ÷ 12 = £2,274.58
• Earnings above threshold: £2,800 − £2,274.58 = £525.42
• Deduction: £525.42 × 9% = £47.29

The £47.29 comes out of their pay each month until the threshold changes or HMRC sends a stop notice.

If an employee has both undergraduate and postgraduate loans, calculate both deductions separately. The undergraduate uses 9%, the postgraduate uses 6%. Both get deducted in the same pay period. It's not a common situation (you're deducting from maybe 10–15% of payrolls in most small businesses), but when it happens, your payroll software handles it automatically once you've entered both loan types.

Reporting through RTI and understanding the payroll impact

Student loan deductions appear in your Real Time Information (RTI) submission to HMRC. Your Full Payment Submission (FPS) each pay period includes fields for the student loan plan type and the amount deducted. Make sure you're reporting the correct plan type — if you report Plan 1 when the employee is actually on Plan 2, the deduction gets applied to the wrong account, and it becomes a headache for the employee to sort out.

One thing to note: the student loan deduction doesn't reduce the employee's National Insurance or tax calculations. It's separate. So when you're calculating what to deduct for tax, National Insurance, pension, and student loan, those are four independent calculations. The payroll system orchestrates them. Which is another reason not to do this in a spreadsheet — too many moving parts.

Your payroll software also tracks year-to-date student loan deductions for each employee, which is useful for internal records and for the employee if they want to verify. It all feeds into RTI automatically.

Frequently Asked Questions

Q: What if the employee says they don't have a student loan, but HMRC has sent me a start notice?

A: You must deduct. If there's a discrepancy, the employee needs to contact the Student Loans Company directly. Your job is to follow the start notice.

Q: What if the employee has already repaid their loan?

A: Continue deducting until you receive a stop notice from HMRC. If they've overpaid, the Student Loans Company refunds them directly. It's not your responsibility to verify the loan balance.

Q: What if I hire someone from abroad who has a student loan from another country?

A: You only deduct for UK student loans administered by the Student Loans Company. Foreign student loans are not collected through UK payroll. If they have a UK student loan as well, deduct for that.

Q: How do directors' student loans work?

A: Directors' student loan deductions are calculated on an annual basis (similar to directors' National Insurance), unless you opt for period-by-period calculation. The annual method prevents over-deduction in months where the director takes a larger payment. Most payroll software offers both options.

Q: What about employees with multiple jobs?

A: Each employer deducts independently based on what that employer pays. The thresholds apply per employment, not in aggregate. So if someone earns £2,000 from you and £1,500 from another employer, you apply the threshold to the £2,000 only.

Q: Do I need to do anything special if an employee moves from one plan to another?

A: HMRC will send you a start notice for the new plan and (usually) a stop notice for the old one. Update your payroll software and continue as normal. It's rare, but it happens when loan regulations change or an employee goes back to study.

Q: What happens if I set up the wrong plan type in payroll?

A: Your RTI submission will report the wrong plan, and the deduction will be credited to the wrong student loan account. Contact HMRC to correct it. It's not a disaster, but it does delay the correction process for the employee. This is why most small-business owners just let their payroll software handle it — fewer chances to mistype.

Q: Are student loan deductions reportable to the employee on their payslip?

A: Yes, they should appear as a separate deduction line, just like tax, National Insurance, and pension. The employee needs to see it clearly so they can verify you're deducting the right amount.

Your role: keep it straightforward

Student loan deductions are one of the simpler parts of payroll. You need to know which plan the employee is on, use the correct threshold and rate, report accurately through RTI, and stop when HMRC tells you to. Honestly, once your payroll software is set up right, the calculations are automatic. Spend your energy on getting the setup right — the plan type, the start date, whether the employee is on multiple loans — and let the system do the math. Paired with understanding your other payroll obligations like tax codes and workplace pensions, student loan deductions are one more piece of the payroll puzzle that, once set up, runs itself.