Repaying Your Student Loan: Who Pays, When & How

Whether you’re a recent graduate starting your first job, or an employer processing payroll for new recruits, understanding how student loan repayments work in the UK is essential. From repayment thresholds and plan types to payroll deductions and financial planning—we’ll break down everything you need to know about repaying your student loan.

What Triggers Student Loan Repayments in the UK?

Student loan repayments don’t begin as soon as you graduate—they start from the April following the end of your course, but only if your income is above the repayment threshold for your plan.

• Key repayment triggers include:
  
  • You must earn above the threshold set for your specific loan plan (e.g. Plan 1, 2, 4 or 5).
    
• Your employment status:
  
  • Employed? Deductions are taken automatically via PAYE.
  • Self-employed? You’ll repay through your Self Assessment tax return.
    
• Employer notice: HMRC issues an SL1 notice when it’s time for an employer to begin deductions. These must be actioned promptly.
  
• Ending deductions: Repayments stop only when HMRC issues an SL2 notice—typically when income falls below the threshold or the loan is cleared.

Tip for employers: Never start or stop student loan deductions without HMRC instruction.

Understanding Student Loan Repayment Plans (Plan 1, 2, 4 & 5)

The type of plan you’re on depends on when and where you studied. Each has its own income threshold, repayment rate, and write-off period.

Plan	Who It’s For	2025/26 Threshold	Repayment Rate	Loan Written Off
Plan 1	England/Wales students (pre-Sept 2012)	£24,990/year	9% above threshold	25 years after eligibility
Plan 2	England/Wales students (Sept 2012–Aug 2023)	£27,295/year	9%	30 years
Plan 4	Scottish students	£27,660/year	9%	30 years
Plan 5	Applies to undergraduate students in England who start their course on or after 1 September 2023.	£25,000/year	9%	40 years after the April following the end of the course

Key Differences Explained:

• Plan 5 is newer and stricter: It has a lower threshold than Plan 2 and extends the repayment window to 40 years, meaning many graduates could pay more over time.
• The 40-year repayment term: This begins from the April after the course ends—not the course start date.
• Interest on Plan 5 loans: Interest is applied from the date of the first loan payment. It’s linked to RPI inflation, with a variable rate capped between RPI and RPI + 3% based on the borrower’s income.
• Repayments are income-based: You’ll only repay when you earn above your plan’s threshold. Regardless of the plan, the rate is always 9% of earnings above that level.
• Employers don’t choose the plan: HMRC tells employers which plan to apply based on the individual’s records. Employees can confirm their repayment plan through gov.uk.

Postgraduate Loan Repayments

In addition to undergraduate loans, some employees may also be repaying a Postgraduate Loan, typically for a master’s or doctoral qualification.

• Threshold (2025/26): £21,000/year
• Repayment Rate: 6% of income above the threshold
• Dual Deductions: Employees can be repaying a postgraduate loan alongside an undergraduate loan (e.g., Plan 2 or Plan 5). In this case, two deductions will appear on the payslip.

Why This Matters for Employers:

• Payroll accuracy: Using the wrong plan results in incorrect deductions, which can lead to underpayments and compliance issues.
• Payslip clarity: Being familiar with the differences helps explain deductions to staff—especially as Plan 5 becomes more common in 2025 and beyond.

Tip for employers: Encourage new staff to check their loan plan before their first payslip. It helps avoid confusion from day one.

How Student Loan Deductions Work Through Payroll

Once HMRC confirms that a staff member needs to start repaying their student loan, the process is automatic—but there are clear responsibilities for both employers and employees.

For Employers: Your Responsibilities

1. Act on HMRC SL1 Notices
   
   • When HMRC issues an SL1 notice, it instructs you to begin student loan deductions through the PAYE system.
   • Employers must start deductions from the next available payroll after receiving the notice.
     
2. Deduct the Correct Amount
   
   • Deductions are either 9%, or 9% of income above the plan’s threshold. Depending on which plan has been assigned.
   • Payroll software (like Sage, Xero, QuickBooks etc.) typically calculates this, but the correct plan (Plan 1, 2, 4, or 5) must be assigned.
     
3. Stop When You Receive an SL2 Notice
   
   • You should only stop deductions when HMRC sends an SL2 notice—even if you think an employee has repaid their loan.
     
4. Report Deductions to HMRC
   
   • All student loan repayments must be reported in your Full Payment Submission (FPS) through Real Time Information (RTI).

For Employees: What Appears on the Payslip

• Deductions will appear under “Student Loan” or “Postgraduate Loan”.
• Student loan deductions are made after tax and National Insurance, but still before final take-home pay (net pay). This means they reduce what appears in an employee’s bank account, even though they don’t reduce taxable income.
• Employees on both a student loan and a postgraduate loan will see two separate deductions.

What Repayments Mean for Take-Home Pay

For many employees, especially recent graduates, seeing a student loan deduction on their payslip for the first time can be confusing—or even stressful. While the repayment process is automatic, it directly affects net pay, and often goes unexplained.

Example Student Loan Repayment:

• Let’s take an employee earning £32,000 under Plan 5 (threshold £25,000)
• Annual income above the threshold: £7,000
• Repayment at 9% = £630/year
• Monthly deduction: £52.50

This £52.50 comes on top of other deductions like tax, National Insurance, and possibly pension contributions.

Understanding Student Loan Repayments Matters

Whether you’re an employee looking at your payslip for the first time or an employer managing payroll, it’s clear that repaying your student loan is more than just a line item—it affects day-to-day finances, team communication, and financial planning.

While repaying your student loan is income-based and managed automatically through HMRC systems, staying informed about the different plans, thresholds, and payroll processes can help reduce confusion and build trust—especially as new repayment rules like Plan 5 become more common in 2025 and beyond.

For repayment purposes, “income” typically means gross earnings before tax, but excluding pension contributions and some salary sacrifice arrangements.

Need Clarity on Payroll or Staff Deductions?

At Nichols & Co, we work closely with employers and business owners to help them navigate payroll compliance, employee queries, and the financial wellbeing of their teams. If you’re unsure how student loans fit into your payroll or want support communicating this to staff, we’re here to help.

Get in touch for tailored advice.