Student and postgraduate loans taken out for higher education are repaid through PAYE once a former student starts work, with the employer calculating and deducting the repayments alongside tax and National Insurance. This article explains how those deductions work for the 2026 to 2027 tax year: the plan types, thresholds and rates, how you are told what to operate, and how everything is reported.
What are student and postgraduate loan deductions through payroll?
A student or postgraduate loan deduction is a repayment the employer takes from an employee's pay and passes to HMRC on behalf of the Student Loans Company. Once a former student's income is high enough, repayments are collected through PAYE in the same way as Income Tax and National Insurance. The employee does not arrange these repayments separately; the employer operates them automatically based on the instructions HMRC or the employee provides. The amount is a percentage of earnings above a set threshold, paid over to HMRC as part of the regular PAYE remittance. Employers do not need to know the outstanding balance, because HMRC and the Student Loans Company handle that; the employer's job is to calculate and deduct correctly each period and to stop when told to.
Which loan plan types exist for 2026 to 2027?
There are four student loan plans plus a separate postgraduate loan: Plan 1 (introduced from 6 April 2000), Plan 2 (from 6 April 2016), Plan 4, the Scottish plan (from 6 April 2021), Plan 5 (from 6 April 2026), and the Postgraduate Loan or PGL (from 6 April 2019). Plan 1, 2, 4 and 5 are mutually exclusive in payroll terms, so you only ever operate one of them at a time for a given employee, even if the person holds more than one. The postgraduate loan is different: it can run on its own or at the same time as one of the four student loan plans. 2026 to 2027 is the first year that Plan 5 borrowers (broadly, students in England who started undergraduate courses from the 2023 to 2024 academic year) reach the point of repaying through payroll.
What makes Plan 4 the Scottish plan?
Plan 4 is the plan used for borrowers whose loans are administered by the Student Awards Agency Scotland. The distinction is about which body administers the loan, not about where the employee lives or works. You should never decide that someone is on Plan 4 simply because they have a Scottish address; the plan type is always confirmed by HMRC or by the employee's own loan account. Plan 4 has its own annual threshold, which for 2026 to 2027 is higher than the thresholds for Plan 1, Plan 2 and Plan 5.
What are the 2026 to 2027 thresholds and rates?
Deductions are only taken on earnings above an annual threshold, which payroll software converts to your pay frequency. The annual thresholds are: Plan 1, £26,900 (£2,241.66 a month); Plan 2, £29,385 (£2,448.75 a month); Plan 4, £33,795 (£2,816.25 a month); Plan 5, £25,000 (£2,083.33 a month); and Postgraduate Loan, £21,000 (£1,750.00 a month). The recovery rate is 9% for Plan 1, 2, 4 and 5, and 6% for the Postgraduate Loan. The rate is applied only to the slice of earnings above the relevant threshold, not the whole of the employee's pay. If someone has both a student loan plan and a postgraduate loan, both rates apply at the same time on their respective thresholds.
How is a single deduction calculated?
You take the employee's earnings subject to Class 1 National Insurance for the pay period, subtract the periodic threshold for the relevant loan, and apply the recovery rate to the remainder, then round the result down to the nearest whole pound. For example, a monthly-paid Plan 2 employee earning £3,000 in a month has £3,000 minus £2,448.75, which is £551.25, multiplied by 9%, giving £49.6125, rounded down to a deduction of £49. If the period's earnings do not exceed the periodic threshold, no deduction is taken. The deduction is always rounded down, so any pence are dropped.
What earnings is the deduction based on?
The deduction is based on the employee's earnings subject to Class 1 National Insurance, which is the National Insurance definition of earnings rather than the figure used for Income Tax. This matters because the two can differ; for instance, pension contributions under a net pay arrangement reduce taxable pay but not the figure used for student loans in the same way. Make sure your software feeds the correct National-Insurance earnings figure into the loan calculation and not the taxable pay figure.
Are deductions cumulative or worked out period by period?
Student and postgraduate loan deductions are non-cumulative. Each pay period is treated on its own, and the deduction is worked out only on that period's earnings against that period's threshold, with no reference to earlier periods or a year-to-date total. This differs from PAYE Income Tax, which is normally cumulative. The effect is that fluctuations are not smoothed out: in a period where earnings fall below the threshold no deduction is made, and that is not corrected later. This is why a one-off bonus can trigger a larger-than-usual loan deduction in that single period.
How will I be told which loan plan to operate?
There are three ways you are told to start a deduction, and in every case the instruction tells you what to do; you do not decide it. First, HMRC may issue a start notice: an SL1 to start a student loan, which states the plan type (Plan 1, 2, 4 or 5), or a PGL1 to start a postgraduate loan. Second, a new employee's P45 may have the "continue student loan" box completed, in which case you ask the employee what type of loan they are repaying and set up the appropriate single plan or postgraduate loan. Third, a new employee may complete a starter checklist that indicates loan deductions are due. HMRC automatically issues SL1 and PGL1 start notices when a new employment is notified, even if deductions have already started from a P45 or starter checklist.
What are start and stop notices?
A start notice is the formal instruction from HMRC to begin a deduction: an SL1 to start a student loan (stating the plan type) or a PGL1 to start a postgraduate loan. A stop notice is the instruction to end one: an SL2 to stop student loan deductions or a PGL2 to stop postgraduate loan deductions. Act on the effective date shown on the notice, and do not stop deductions on your own initiative, because only HMRC knows when the loan is fully repaid or no longer due. If a notice conflicts with what you are operating, the HMRC notice takes precedence. Keep these notices on file in case of any later query.
What if a new employee does not know their plan type?
If an employee with a student loan does not know which plan they are repaying, you must operate the student loan plan with the lowest threshold until HMRC tells you otherwise. The employee can confirm their plan type by signing in to their student loan account with the Student Loans Company. You continue with the lowest-threshold plan until an SL1 arrives confirming the correct plan, then switch to whatever the SL1 states. You should never guess the plan type, because operating the wrong one means the employee repays at the wrong threshold and potentially the wrong amount, and it is HMRC, not the employer, who confirms the correct plan. Guessing risks under-deducting or over-deducting, both of which create corrections later.
Can an employee have both a student loan and a postgraduate loan?
Yes. An employee can have both a student loan plan (Plan 1, 2, 4 or 5) and a postgraduate loan running at the same time, because the postgraduate loan is separate from the undergraduate plans. You operate one student loan plan plus the postgraduate loan together, each with its own threshold and rate. You never operate two student loan plans at once. So the maximum combination in a single pay run is one student loan plan at 9% plus a postgraduate loan at 6%, calculated on their separate thresholds and then added together. Where there is not enough pay to take everything, for example where a priority attachment of earnings order with protected earnings applies, the postgraduate loan is dealt with first because it carries a higher rate of interest, and the loan deductions cannot reduce pay below the protected earnings amount.
How does the deduction appear on the payslip?
Student loan and postgraduate loan deductions are shown on the payslip as deductions from gross pay, separate from Income Tax and National Insurance, so the employee can see what has been taken. Where both a student loan plan and a postgraduate loan are in operation, good practice is to show them as separate lines so the 9% plan deduction and the 6% postgraduate deduction are each identifiable. The deducted amounts reduce the employee's net pay in the period and are paid over to HMRC as part of the PAYE remittance.
How are loans reported on the Full Payment Submission?
The Full Payment Submission (FPS) carries the loan data each pay period: the value of the student loan repayment in the period, the student loan plan type in use, the value of the postgraduate loan repayment in the period, and the year-to-date totals for each in the current employment. There are also starter indicators showing that a student loan or postgraduate loan deduction is needed. Reporting the plan type each period lets HMRC reconcile the repayment against the correct loan and spot if the wrong plan is being operated. Once a year-to-date amount has been sent, it must continue to be supplied for the rest of the tax year, and the plan type reported must match the plan you actually used.
What happens when an employee changes jobs?
When an employee leaves, their loan repayments stop with that employer when employment ends, and the P45 shows whether a student loan was being deducted via the "continue student loan" indicator. The new employer picks up the obligation: they ask what type of loan is being repaid and set up the appropriate plan or postgraduate loan, supported by the starter checklist, and HMRC automatically issues SL1 and PGL1 start notices once the new employment is notified. Because the deductions are non-cumulative and worked out per period, the new employer simply starts fresh from the start date and does not need year-to-date loan figures from the previous employer.
What about off-payroll workers, and does the deduction affect tax, NI or pensions?
Where a worker is a deemed employee under the off-payroll working rules, student and postgraduate loan repayments are not collected through the client's payroll and the start-notice process does not apply; the worker settles any repayments through their own arrangements. Separately, loan deductions are calculated independently and do not change the figures used for Income Tax, National Insurance or pension contributions. They are taken after tax and National Insurance and do not reduce the earnings on which those are calculated. The only effect on the employee is a lower take-home figure.
What records and good practice should employers keep?
Keep the start and stop notices (SL1, PGL1, SL2, PGL2) received from HMRC, any P45 showing a continuing student loan, and completed starter checklists, because these are your evidence for the plan type and the dates you operated. Make sure your payroll software holds the correct 2026 to 2027 thresholds and rates, applies the right one to each pay frequency, and uses the National-Insurance earnings figure as the basis. Act promptly on every HMRC notice, on the effective date shown, to keep repayments accurate and avoid corrections. Where an employee queries a deduction, you can explain that the amount follows from the plan type, the threshold and the rate, and that the plan type comes from HMRC or the employee's own loan account rather than the employer's judgement.