Student loan deductions through payroll: A complete guide for UK employers

Student loan deductions are repayments that are collected from an employee’s salary through PAYE payroll once their earnings go above the relevant repayment threshold. Employers calculate student loan deductions from an employee’s relevant gross pay and take the required amount from their earnings before paying the employee their salary. 

Unlike a standard loan repayment, employees don’t make fixed monthly payments directly to their student loan provider. Instead, repayments are automatically collected through payroll and passed to HMRC, which manages the collection process. 

The amount deducted depends on factors including the employee’s loan plan, earnings, and the applicable repayment threshold. This means that payroll teams need to apply the correct rules each time they process employee pay. 

There are several types of student loans that employers may need to process through payroll. We’ve explained the differences between each plan below, but always check the latest HMRC guidance for the current threshold before processing payroll. 

Plan 1 

Plan 1 loans generally apply to employees who started undergraduate courses before September 2012 in England and Wales, as well as some borrowers from Scotland and Northern Ireland. 

For the 2026/27 tax year, repayments are calculated at 9% of earnings above the Plan 1 repayment threshold. 

Plan 2 

Plan 2 loans generally apply to employees who started undergraduate courses in England and Wales from September 2012 onwards. 

Like Plan 1 loans, repayments are calculated at 9% of earnings above the relevant threshold. However, the repayment threshold for Plan 2 is different, meaning two employees with similar salaries could have different deductions depending on their loan type. 

Plan 4 

Plan 4 loans mainly apply to borrowers who studied in Scotland. 

These loans also use a 9% repayment rate, but they have their own repayment threshold. Make sure to check the employee’s loan plan information rather than assuming the plan type based on where the employee currently lives. 

Plan 5 

Plan 5 loans apply to certain students who started undergraduate courses in England from August 2023 onwards. 

Employers should check HMRC guidance when processing deductions for Plan 5 loans, as repayment rules and thresholds differ from other undergraduate loan types. 

Postgraduate Loan 

Postgraduate Loans (previously Plan 3) apply to eligible postgraduate borrowers in England and Wales. 

Unlike undergraduate loans, repayments are calculated at 6% of earnings above the postgraduate loan threshold. Employees can have both an undergraduate loan and a postgraduate loan, meaning payroll would need to process multiple deductions at the same time. 

Knowing when to act helps to avoid incorrect deductions and ensures that employees repay the correct amount through PAYE. Let’s explore the scenarios that require an employer to start or stop student loan deductions through payroll. 

HMRC instructions 

The most common reason to start deductions is receiving a student loan start notice from HMRC. Follow the instruction provided and begin making deductions from the employee’s pay from the date specified. 

Employee P45 information  

When a new employee joins, their previous employer’s P45 may include information about student loan deductions. If the P45 indicates that deductions should continue, the new employer should continue making repayments through payroll. 

Starter checklist  

If an employee doesn’t provide a P45, they will need to complete a Starter Checklist (formerly P46) when joining a new employer. The checklist allows employees to confirm whether they have a student loan, so the employer knows whether deductions may need to begin while waiting for further HMRC instructions. 

Stopping deductions 

Employers should stop student loan deductions when instructed by HMRC. An employee may tell their employer that they have repaid their loan, but you should always wait for official confirmation before stopping deductions. HMRC will issue the appropriate stop notice when repayments are no longer required. 

When it comes to student loan deduction, employers have certain responsibilities that they must follow to ensure accurate payments and HMRC compliance. Let’s look at them in more detail. 

Making accurate deductions from employee earnings 

Employers must calculate and deduct the correct repayment amount from an employee’s earnings once they receive the relevant instructions. Student loan repayments are deducted from pay before the employee receives their final net pay, with the amount shown clearly on payroll documentation. 

Keeping clear payroll records 

Employers must keep accurate records of student loan deductions made from employee earnings. Payroll reports make it easier to check deductions, answer employee queries, and provide accurate information if records need to be reviewed. 

Paying deductions to HMRC 

Student loans collected through payroll must be paid to HMRC alongside other PAYE deductions. Employers are responsible for ensuring that the correct deductions are included in PAYE and processed within the required deadlines. 

Reporting deductions through FPS submission 

Employers must include student loan deduction information when submitting their Full Payment Submission (FPS) to HMRC. Accurate FPS payroll reporting ensures that HMRC has the correct information about employee repayments and helps to maintain up-to-date records. 

Showing deductions on payslips and P60 certificates 

Student loan deductions should be included on employee payslips so they can see how much has been taken from their earnings. Employers must also ensure that these deductions are accurately recorded on the employee’s P60 certificate at the end of the tax year, alongside other relevant pay and tax information. 

Completing P45 information correctly 

When an employee leaves, employers must complete their P45 correctly and indicate whether student loan deductions should continue. This informs the next employer of the repayment status so they can continue deductions where required. 

Calculating repayments correctly requires employers to follow a consistent process. Accurate student loan deduction through payroll helps ensure employees repay the correct amount while keeping the business compliant. We’ve put together a step-by-step guide to the process of repaying student loans through payroll in the UK. 

Step 1: Determine the employee’s student loan plan type 

The first step is identifying which student loan plan applies to the employee. Employers should use information from HMRC notifications, P45 forms or Starter Checklists rather than making assumptions based on an employee’s age, course or location. 

Step 2: Calculate the employee’s earnings for student loan purposes 

Student loan deductions are based on the employee’s gross pay, and arrangements such as salary sacrifice schemes may affect the earnings used for calculations. For example, healthcare benefits, cycle-to-work schemes or electric vehicle payments may reduce contractual pay and affect the calculation. 

Step 3: Apply the correct repayment threshold 

Once the relevant earnings figure is identified, you need to apply the correct repayment threshold for the employee’s loan type. Most undergraduate loans require a 9% deduction from earnings above the threshold, while postgraduate loans require a 6% deduction. Employers should check the latest HMRC thresholds each tax year. 

Step 4: Deduct the repayment amount from the employee’s salary 

The calculated repayment amount is then deducted through payroll before the employee receives their pay. The deducted amount should appear clearly on the employee’s payslip so they can understand how the repayment has been calculated. 

Step 5: Pay and report the deduction to HMRC 

After processing the deduction, you must include the information in your payroll reporting and make the payment to HMRC. Keeping accurate records throughout the process helps to manage corrections or queries more easily. 

According to Student Loans Company data, 3 million borrowers were in active repayment in 2024-25. That scale means most payroll teams will be managing student loan deductions regularly, and the consequences of getting them wrong (overpayments, HMRC queries, correction work) fall on both the employee and the employer. Here are the situations most likely to cause problems. 

Changing employee circumstances 

Employee circumstances can change throughout their employment, affecting how deductions should be processed. Changes such as salary increases, new employment, updated HMRC instructions or changes to loan status can all require payroll teams to review deductions. 

Employees with more than one loan type 

Some employees may have both an undergraduate loan and a postgraduate loan. Managing multiple deductions requires payroll teams to apply the correct repayment rules for each loan type, and make sure the calculations are accurate. 

Employees joining or leaving mid-year 

Employees joining or leaving during the tax year can create additional payroll considerations. Employers need to review information from previous employers, HMRC notifications and leaving documents to make sure deductions continue correctly. 

Accounting for pensions and other payroll adjustments 

Payroll calculations can be affected by different earnings arrangements and deductions, including pensions and salary sacrifice schemes. Understanding how each payroll adjustment affects relevant earnings helps to avoid incorrect student loan calculations. 

Keeping up with changing repayment thresholds 

Student loan thresholds and repayment rules can change each tax year. Keeping up with changing payroll legislation is essential to keep your payroll calculations accurate and make sure employees repay the correct amount. 

Managing student loan repayments correctly requires accurate calculations, up-to-date information, and reliable reporting processes. By understanding loan types, employer responsibilities and calculation steps, you can make sure you handle deductions correctly. 

PeopleHR’s flexible payroll software can simplify the processes for managing student loan deductions through payroll by supporting accurate calculations and reducing manual admin. It also makes it easier to keep reliable records for HMRC reporting. 

Book a demo or contact us to see how PeopleHR can help you to manage both everyday payroll and more complex deductions more efficiently. 

If you enjoyed this article, you may be interested in reading: 

• FPS and EPS payroll: What are they and what’s the difference? 
• What is a P60 and why is it important? 
• Salary sacrifice schemes: A complete guide for UK employers