An employee on the new Plan 5 student loan starts repaying at £25,000 a year, while a Plan 4 borrower keeps every pound until £33,795, a gap of £8,795 on the same salary [1]. Student and postgraduate loans are repaid at 9% and 6% respectively of earnings above those thresholds, deducted by the employer through payroll and reported to HMRC on every Full Payment Submission [1][2].
For the employer, student loan deductions are not discretionary. They begin on a start notice and end on a stop notice, they cannot be paused because an employee asks, and getting the plan type wrong pulls the wrong amount from someone's pay [1]. From 6 April 2026 the rules changed in two ways that payroll teams have to absorb: a fifth repayment plan came fully into collection, and the default plan for an unknown borrower switched to Plan 5 [1].
This article sets out how employers operate student and postgraduate loan deductions: the 2026-27 thresholds and rates, how to identify the right plan, the SL1 and SL2 notice mechanics, how postgraduate loans run alongside a plan loan, and the edge cases that trip payroll up, from leavers to court orders.
Key takeaways
- Student loans (Plan 1, 2, 4 and 5) repay at 9% above the threshold; postgraduate loans repay at 6% [1].
- The 2026-27 thresholds range from £25,000 (Plan 5) to £33,795 (Plan 4), with the postgraduate loan threshold at £21,000 [1].
- Deductions start on an SL1 or PGL1 notice, a P45 marker or starter information, and stop only on an SL2 or PGL2 notice [1].
- If an employee cannot confirm their plan, the employer defaults to Plan 5 until an SL1 arrives [1].
- An employee can repay a postgraduate loan and a student loan at the same time, as two separate concurrent deductions [1].
The 2026-27 plans, thresholds and rates
There are four student loan plans and one postgraduate loan, and each has its own annual threshold below which nothing is deducted [1]. The plan an employee is on depends on where and when they studied, not on anything the employer decides. There is no Plan 3, a gap in the numbering that regularly causes confusion [6].
The threshold is expressed annually but applied per pay period, so a monthly payroll uses one twelfth of the annual figure and a weekly payroll one fifty-second [1]. The rate is a flat 9% of earnings above the threshold for every student loan plan, and 6% for the postgraduate loan [2].
| Plan | Annual threshold | Monthly | Weekly | Rate |
|---|---|---|---|---|
| Plan 1 | £26,900 | £2,241.66 | £517.30 | 9% |
| Plan 2 | £29,385 | £2,448.75 | £565.09 | 9% |
| Plan 4 | £33,795 | £2,816.25 | £649.90 | 9% |
| Plan 5 | £25,000 | £2,083.33 | £480.76 | 9% |
| Postgraduate loan | £21,000 | £1,750.00 | £403.84 | 6% |
The choice of plan makes a large difference to the same worker. An employee earning £35,000 repays roughly £900 a year on Plan 5, about £729 on Plan 1, but only around £108 on Plan 4, because the Plan 4 threshold sits almost £9,000 higher [1]. This is why applying the wrong plan is not a rounding error, it changes the deduction several times over, and why HMRC-recognised payroll software for SMEs applies the plan-specific threshold automatically rather than leaving it to a manual lookup.
How the deduction is calculated
The deduction is worked out on the same gross pay figure the employer uses for its secondary Class 1 National Insurance contributions, not on taxable pay or net pay [1]. The formula is the earnings in the period, minus the period threshold, multiplied by the rate, rounded down to the nearest whole pound [4].
Take a Plan 2 borrower paid £3,000 in a month. The monthly threshold is £2,448.75, leaving £551.25 above it. At 9% that is £49.61, which rounds down to a £49 deduction for the month [4]. The figure entered on the Full Payment Submission and the P60 is always in whole pounds [1]. Deductions are never made in arrears, so a period where earnings fall below the threshold simply produces no deduction rather than a catch-up later [1].
Identifying the right plan and starting deductions
An employer starts student loan deductions when one of several triggers appears, and each carries the plan information the employer needs [1]. The most common are a new employee's P45 showing deductions should continue, the employee stating they are repaying a loan, a completed starter checklist, or an SL1 or PGL1 start notice from HMRC [1][10].
When a start is triggered by the employee rather than by an SL1, the employer asks the employee to confirm which plan they are on [1]. An employee who is unsure can check their plan through their student loan account before payroll runs [5]. Getting this right at the point of hire, alongside the correct tax code, avoids a correction on the first payslip [9].
The Plan 5 default from 6 April 2026
The default rule changed from 6 April 2026. Where an employee knows they have a student loan but cannot say which plan, the employer now defaults to Plan 5 in the payroll software until an SL1 start notice arrives with the correct plan [1]. This replaced the previous default and reflects Plan 5 coming fully into collection [1].
The default has a boundary. Defaulting to Plan 5 is only appropriate for a borrower who may be on Plan 1, Plan 2 or Plan 4, not as a substitute for a postgraduate loan, which is a separate loan type with its own notice [1]. Where an employee holds more than one plan and the employer does not yet have an SL1, deductions start on the plan with the lowest recovery threshold until HMRC confirms which applies [1].
When an SL1 or PGL1 arrives
An SL1 start notice tells the employer which plan type to operate, and a PGL1 tells them a postgraduate loan is due [1]. If the employer is already deducting but the SL1 shows a different plan, they switch to the plan on the notice from the next available payday rather than backdating [1]. An SL1 for someone the employer has never employed should be queried with the Employer helpline rather than actioned [1].
HMRC reinforces these notices with generic notification service messages in the employer's PAYE online account, prompting a start, a plan-type correction, or a stop [1]. A message flagging that the plan declared on the FPS does not match HMRC's record is a signal to check the SL1 or starter checklist and correct the plan from the first available payday [1]. Bureaux managing this across many client schemes typically rely on a payroll bureau platform that surfaces these notices per employer rather than leaving them buried in separate online accounts.
Postgraduate loans alongside a plan loan
A frequent misconception is that a postgraduate loan and a student loan are deducted in a strict order, one before the other. In normal payroll they run concurrently: an employee liable for both repays a Plan 1, 2, 4 or 5 loan and a postgraduate loan at the same time, as two separate deductions worked out on the same earnings [1]. The 9% plan deduction and the 6% postgraduate deduction are calculated independently against their own thresholds [2].
The ordering rule that does exist applies only where a court order with a protected earnings level is in play. In that narrow case, when deductions would take pay below the protected level, the postgraduate loan takes priority before the student loan [1]. Outside that scenario there is no sequencing, both simply apply. For platforms building payroll into their own products, an HMRC-recognised payroll API handles concurrent plan and postgraduate deductions in a single calculation rather than as a bolt-on.
Stopping deductions and handling leavers
An employer cannot stop student loan deductions on the employee's word. Deductions end only when the employer receives an SL2 or PGL2 stop notice from HMRC, or exceptional written instructions to stop [1]. An employee who believes they have finished repaying, or overpaid, is directed to claim a refund from the Student Loans Company, not to ask the employer to switch the deduction off [11].
When an SL2 or PGL2 arrives, the employer stops from the first available payday after the stop date on the notice [1]. The stop notice and its plan detail are then kept on file, because record-keeping obligations run for at least three years after the end of the relevant tax year [1].
Leavers and the P45
Leavers need careful handling so the deduction follows the employee to their next job. Where deductions should continue, the employer marks 'Y' in box 5 of the P45 and reports the leaver through Real Time Information, entering 'Y' even if the employee did not earn enough to make a repayment in their final period [1][8]. This tells the next employer that a loan is in repayment.
Box 5 is left blank only where a stop notice or written HMRC instruction has been received, or where an SL1 arrives with a start date falling after the employee has already left [1]. A separate rule covers death: no student or postgraduate loan deduction is made from any payment after the date of death, because such payments carry no Class 1 National Insurance and therefore no loan liability [1].
Off-payroll workers and other edge cases
Off-payroll working is a common source of over-deduction. Where a worker is engaged through their own company under the off-payroll rules, the engager does not deduct student or postgraduate loan repayments; the worker accounts for the loan through their own tax return instead [1]. Applying a payroll deduction to a deemed-employment payment is a frequent error, and HMRC issues a specific generic notification to stop it [7].
Several other situations change the calculation. An employee with more than one job at different employers has each employment assessed on its own earnings, with the other employer's pay ignored [1]. A change of pay interval, from weekly to monthly for example, requires the deduction to be reworked on the new earnings period, taking account of anything already deducted in the overlap [1].
Correcting an over or under-deduction
Where an employer has deducted too much in the current tax year, it repays the borrower and amends the year-to-date payroll records; where it has deducted too little, it recovers the shortfall from the employee within the year [1]. Recovery is capped per period: in any pay period the employer can only collect an extra amount up to the deduction otherwise due that period, spreading a larger under-deduction across several periods [1].
Once the final Full Payment Submission for a year has been filed, the employer takes no further action on that year's under-deductions, and directs the employee to the Student Loans Company for anything relating to a closed year [1]. Accurate reporting matters throughout, because a late or wrong FPS can attract a filing penalty in its own right, independent of the loan figures it carries [12].
Conclusion
Student loan deductions look like a single 9% rule, but the operating detail is where payroll teams get caught: five different thresholds, a 6% postgraduate rate that runs concurrently rather than in sequence, a default that moved to Plan 5, and a start-and-stop discipline driven entirely by HMRC notices rather than employee requests. The employer's job is not to judge whether a deduction is right, it is to apply the correct plan the moment a trigger appears and to stop only when told.
As the borrower population shifts towards Plan 5 and postgraduate loans become more common, the share of payslips carrying two concurrent loan deductions will keep rising, and the cost of applying the wrong plan rises with it. The employers who handle this cleanly are the ones whose software reads the SL1, applies the plan threshold, and reports the whole-pound figure on the FPS without a manual step. A business weighing how these deductions interact with a worker's wider tax position can start from a PAYE and self-assessment explainer, and anyone engaging contractors should pair it with an IR35 off-payroll guide before running a single deduction.
Frequently asked questions
What are the student loan repayment thresholds for 2026-27?
For the 2026-27 tax year the annual thresholds are £26,900 for Plan 1, £29,385 for Plan 2, £33,795 for Plan 4, £25,000 for Plan 5, and £21,000 for the postgraduate loan [1]. Student loan plans deduct 9% of earnings above the threshold, while the postgraduate loan deducts 6% [2]. The thresholds are applied per pay period, so a monthly payroll uses one twelfth of the annual figure.
What plan should an employer use if the employee does not know theirs?
From 6 April 2026, if an employee knows they have a student loan but cannot confirm the plan, the employer defaults to Plan 5 in the payroll software until an SL1 start notice arrives with the correct plan [1]. This default is only appropriate where the borrower may be on Plan 1, 2 or 4, and does not apply to postgraduate loans. If the employee has more than one plan, the employer starts with the plan carrying the lowest threshold until HMRC confirms which applies [1].
Can an employer stop student loan deductions if the employee asks?
No. An employer stops deductions only on receiving an SL2 or PGL2 stop notice from HMRC, or written instructions from HMRC to stop [1]. An employee who believes they have overpaid or cleared their loan should claim a refund from the Student Loans Company rather than ask the employer to switch off the deduction [11]. Deductions then stop from the first available payday after the date shown on the stop notice.
Do student loan deductions apply to off-payroll (IR35) workers?
No. Where a worker is engaged through their own company under the off-payroll working rules, the engager does not deduct student or postgraduate loan repayments through payroll [1]. The worker accounts for their loan obligation through their own self-assessment tax return instead [7]. Applying a payroll deduction to a deemed-employment payment is a common mistake, and HMRC issues a specific notification telling the employer to stop.
Image prompt for Imagen (also in frontmatter)
Documentary photograph, hands of a young UK graduate at a kitchen table holding a paper payslip, a laptop open beside them, soft natural daylight from a window, mid-morning, palette of cream, oak, soft denim blue, terraced housing visible through the window, the hands and paper anchor the lower-third of the frame, shot on a Canon R6 at 50mm f/2.8, photojournalism, subtle film grain, no AI artefacts, no warped hands, no warped text, landscape orientation 16:9.
