How student loan payroll deductions work for employers

Employers must manage student loan payroll deductions when employees earn above the relevant repayment threshold. These deductions are processed through PAYE and sent to HMRC alongside income tax and National Insurance.

Student loan and postgraduate loan repayments are calculated automatically through payroll once HMRC confirms that deductions should begin.

Understanding how these deductions work helps employers process payroll accurately and avoid reporting errors.

When deductions start

Student loan deductions do not begin automatically when an employee joins your organisation.

HMRC will notify employers when repayments should start. This usually happens through a start notice sent via payroll software or through the employer’s HMRC account.

Once the notice is received, employers must begin deductions from the next available payroll run.

Repayments continue until HMRC sends a stop notice or the employee leaves employment.

Loan plan types

Student loan deductions depend on the employee’s loan plan. Each plan has a different payroll student loan threshold.

Common loan plans include:

• Plan 1 – typically for students from England or Wales who started before 2012
• Plan 2 – for many English and Welsh students who started from 2012 onwards
• Plan 4 – usually for Scottish students
• Plan 5 – introduced for newer English student loans
• Postgraduate loan (PGL) – separate repayment rules for postgraduate study

Payroll systems must apply the correct plan type so the repayment threshold and deduction percentage are calculated correctly.

HMRC notifications will confirm the plan type that applies to each employee.

Payroll calculation

When an employee’s earnings exceed the relevant payroll student loan threshold, deductions begin.

Payroll software calculates repayments as a percentage of earnings above the threshold for that loan plan.

These repayments are deducted from the employee’s net pay alongside other statutory deductions such as income tax and National Insurance.

The deducted amounts are reported to HMRC through Real Time Information (RTI) submissions and paid with the employer’s PAYE liability.

HMRC notifications

Employers should only start or stop student loan payroll deductions when HMRC issues a notification.

These notifications normally include:

• Start notices (SL1 or PGL1) instructing employers to begin deductions
• Stop notices (SL2 or PGL2) confirming deductions should end

Employees may sometimes state they have repaid their loan. However, deductions must continue until HMRC sends an official stop notice.

You must start making deductions for student loan if you receive a new starter declaration from the employee stating they have a student loan or if they provide a P45 from a previous employer, and the box for ‘continue student loan’ is marked as Y (yes)

The P45 does not specify the plan type (Plan 1, 2, 4, or 5). Ask the employee to confirm their plan or use the starter checklist.

If the employee does not know their plan type, you must treat it as a Plan 1 loan until notified otherwise by HMRC.

Common payroll errors

Student loan deductions can cause confusion during payroll processing.

Common issues include:

• Applying the wrong loan plan type
• Starting deductions before receiving an HMRC notice
• Missing deductions after receiving a start notice
• Continuing deductions after a stop notice
• Using incorrect payroll thresholds

Accurate employee records and well-configured payroll software reduce the risk of these errors.

Regular payroll checks also help ensure deductions are processed correctly.

Managing student loan payroll deductions correctly

Managing student loan payroll deductions is part of maintaining compliant payroll processes.

Employers should:

• Ensure payroll systems are updated with current thresholds
• Apply the correct loan plan for each employee
• Follow HMRC notices when starting or stopping deductions
• Review payroll reports regularly

Clear payroll processes help avoid reporting issues and ensure repayments are sent to HMRC correctly.

Need support with payroll deductions?

Managing payroll alongside changing tax rules and loan repayment thresholds requires careful administration.

At dhpayroll, we support businesses with payroll processing, PAYE reporting and compliance. Our team ensures deductions are calculated correctly and reported to HMRC on time.

Speak to our payroll team if you would like support managing payroll systems and employee deductions.

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