Student loan deductions are one of the more detail-heavy areas of payroll processing. With multiple repayment plan types, annual threshold changes, and new employee starter declarations to consider, it is easy for errors to creep in—particularly at the start of a new tax year.
This guide sets out everything payroll professionals need to know about student loan 2026 obligations: the updated repayment thresholds for 2026–27, how each plan type works in practice, and what your payroll function should have in place to remain compliant.
The Student Loan Repayment Framework: A Brief Overview
Student loan repayments in the United Kingdom are not collected directly by loan providers. Instead, HM Revenue & Customs (HMRC) administers repayments through the Pay As You Earn (PAYE) system, meaning employers are responsible for calculating and deducting the correct amounts from employees’ pay.
This arrangement places a compliance obligation on payroll teams. If the wrong plan type is applied, or if deductions begin or cease at the wrong time, the employer may face penalties or be required to correct records retrospectively.
There are currently five student loan repayment plan types in operation:
- Plan 1 – for those who started university before September 2012 (England and Wales), or who studied in Scotland or Northern Ireland
- Plan 2 – for English and Welsh students who began undergraduate study on or after 1 September 2012
- Plan 4 – for Scottish students who started an undergraduate or postgraduate course on or after 1 September 1998
- Plan 5 – for English students beginning undergraduate study from the 2023–24 academic year onwards
- Postgraduate Loan (PGL) – for employees who hold a postgraduate master’s or doctoral loan
An employee may be subject to more than one plan type simultaneously—for example, a Plan 2 undergraduate loan running concurrently with a Postgraduate Loan. Payroll must handle both correctly and in parallel.
Updated Repayment Thresholds for 2026–27
The repayment threshold is the point at which deductions begin. Employees earning below the threshold for their plan type will have no deductions taken, regardless of their outstanding loan balance. Earnings above the threshold are subject to deductions at the applicable rate.
The confirmed thresholds for the 2026–27 tax year are as follows:
| Plan | Annual earnings threshold 2026/27 | Annual earnings threshold 2025/26 | Repayment rate |
|---|---|---|---|
| Plan 1 | £26,900 | £26,065 | 9% |
| Plan 2 | £29,385 | £28,470 | 9% |
| Plan 4 | £33,795 | £32,745 | 9% |
| Plan 5 | £25,000 | N/A (new) | 9% |
| Postgraduate | £21,000 | £21,000 | 6% |
Deductions are calculated on earnings above the threshold, not on total earnings.
How Payroll Calculates Student Loan Deductions
Student loan deductions are calculated on the same basis as National Insurance (NI) contributions—that is, on a pay-period-by-pay-period basis, not cumulatively over the year. This means that if an employee’s earnings vary from month to month, their deduction will vary accordingly.
The steps for calculating a deduction in any given pay period are:
- Establish the employee’s gross pay for the period.
- Identify the applicable plan type (or types).
- Determine the threshold for that plan type in the relevant pay period (weekly, monthly, or four-weekly, as appropriate).
- Subtract the threshold from gross pay to arrive at the repayable amount. If gross pay is at or below the threshold, no deduction applies.
- Apply the deduction rate (9% for Plans 1, 2, 4, and 5; 6% for Postgraduate Loans).
- Round the result down to the nearest pound.
- Where an employee holds both an income-contingent loan and a Postgraduate Loan, calculate and deduct both separately.
Pensionable Pay and Other Deductions
Student loan deductions are made from gross pay, before pension deductions under salary sacrifice arrangements. However, payroll teams should verify this in the context of the specific scheme rules in place, as the treatment can vary.
Identifying the Correct Plan Type
Starter Declarations
When a new employee joins and confirms they have a student loan, their starter checklist or P45 will indicate the plan type to be applied. This information should be entered accurately into the payroll system at the point of on-boarding.
If an employee does not know their plan type, HMRC guidance advises defaulting to Plan 1 until a Start Notice (SL1) is received from HMRC, provided the employee started their course before September 2012. For those who began their course after that date, Plan 2 should be applied until clarification is received.
HMRC Notices
HMRC issues two types of notice that directly affect student loan processing:
- SL1 (Start Notice): Instructs the employer to begin deductions for a named employee. The notice specifies the plan type.
- SL2 (Stop Notice): Instructs the employer to cease deductions. This is typically issued when a loan has been repaid in full or when the employee’s account requires adjustment.
Both notices should be acted upon promptly—in most cases, from the first pay day following receipt. Failure to act on an SL1 or SL2 in a timely way can lead to under- or over-deductions, and HMRC may require corrections to be made.
What to Do When You Are Unsure
If a new employee’s plan type is genuinely unclear and no HMRC notice has been received, payroll should:
- Ask the employee to check their loan details via the Student Loans Company (SLC) online service or by contacting the SLC directly.
- Apply a default plan type in line with HMRC guidance while waiting for confirmation.
- Document the steps taken and update the record as soon as the correct information is available.
Common Payroll Errors and How to Avoid Them
Processing student loan deductions accurately requires attention to a number of areas where mistakes are frequently made. The following checklist summarises the most common issues:
Things to verify at the start of each tax year:
- Updated thresholds have been loaded into the payroll system for all relevant plan types
- Plan 5 is applied correctly to employees who commenced studies from 2023–24 onwards
- Any outstanding SL1 or SL2 notices have been actioned
- Employees with both an income-contingent loan and a Postgraduate Loan are set up for dual deductions
Things to check on an ongoing basis:
- Starter checklists or P45s are reviewed for student loan information at the point of new starter on-boarding
- Deductions are reported accurately on Full Payment Submissions (FPS) to HMRC each pay period
- Employees who change their hours or earnings significantly are reviewed to confirm whether threshold positions have changed
- Stop notices are applied from the correct pay date and the employee record is updated accordingly
Postgraduate Loans: A Separate Consideration
Postgraduate Loans are handled differently from undergraduate plans in several respects. The deduction rate is 6% rather than 9%, and the annual threshold for 2026–27 is £21,000—lower than all undergraduate plan thresholds.
It is also worth noting that Postgraduate Loan deductions run concurrently with undergraduate loan deductions where both apply. If an employee holds a Plan 2 undergraduate loan and a Postgraduate Loan, two separate deductions must be calculated and reported independently.
HMRC will issue a PGL1 Start Notice and PGL2 Stop Notice in the same way it issues SL1 and SL2 notices for undergraduate plans. Payroll teams should ensure their system is configured to distinguish between these notice types and apply them correctly.
Reporting Student Loan Deductions to HMRC
Student loan deductions are reported to HMRC via the Full Payment Submission, submitted on or before each pay date. The FPS must include the total deductions made for each plan type in the relevant pay period.
If an error is identified after submission—for example, deductions were taken at the wrong rate or from the wrong threshold—a correction should be submitted as soon as possible. Voluntary corrections made promptly are treated more favourably by HMRC than those identified during compliance checks.
For further guidance on the reporting process, HMRC’s employer guidance on student loan and postgraduate loan deductions provides authoritative detail on notices, thresholds, and employer obligations.
Considerations for Specific Employee Groups
Employees Who Move Between Employers
When an employee moves to a new employer mid-year, their P45 should confirm whether student loan deductions are in operation and, where possible, the plan type. However, not all P45s will include this information accurately. If the plan type is missing, the steps outlined in the “Identifying the Correct Plan Type” section above should be followed.
Employees Approaching the End of Their Loan
HMRC will issue an SL2 Stop Notice when an employee’s loan is due to be repaid in full. Employers should not make a judgement on this independently—deductions must continue until the stop notice is received. The SLC manages the repayment data and instructs HMRC accordingly.
Employees on Variable Pay
For employees whose pay fluctuates—those on zero-hours contracts, irregular overtime, or commission-based earnings—the pay-period calculation basis means that deductions will vary each period in line with earnings. This is the correct approach and does not require any additional action from payroll, provided the threshold figures are correct.
Take the Complexity Out of Student Loan Processing
Student loan deductions are a non-negotiable element of PAYE compliance. The penalty for persistent errors—whether through incorrect plan types, missed threshold updates, or delayed responses to HMRC notices—can include financial liability and reputational risk with your workforce.
Just Payroll Services provides fully managed payroll bureau services that handle all HMRC-compliant deductions as standard. Our specialists remain current with legislative changes and notice processing, so your organisation remains compliant without additional administrative burden.
Speak to our specialists to find out how Just Payroll Services can support your organisation’s payroll compliance.