How to manage student and postgraduate loans on payroll

According to Government statistics, around 1.5 million students receive student loans every year in the UK. Once the students have graduated and moved on to employment, the repayment of the loans begin, with small amounts being deducted from their salaries each month.

The amount deducted can vary on the student loan plan type and the amount that the student is earning per month in their job, so managing these loans on payroll is an important responsibility.

The repayment plan options for student loans in the UK are as follows:

Plan 1

Plan 1 applies to anyone who took out a student loan between 1 September 1998 and 30 August 2012 and were studying in England or Wales. It also applies to those who took out a student loan from 1 September 1998 to the present day if they studied in Northern Ireland.

The current threshold for making student loan repayments on this plan is an annual salary of £22,015. If an employee on plan 1 is earning more than this threshold, they will pay nine per cent of the difference between £22,015 and their current salary.

Plan 2

Plan 2 applies to students in England who took out loans between 1 September 2012 and 31 July 2023, and to students in Wales who have taken out loans since 1 September 2012.

The current threshold for plan 2 student loans is £27,295, any employee earning more than this should pay nine per cent on anything that they earn over this threshold.

Plan 4

Plan 4 applies only to students studying in Scotland who have taken out a loan since 1st September 1998.

The threshold to start making deductions is higher on plan 4, with nothing to pay until the employee starts earning more than £27,660. Employees will then pay nine per cent of any amount earned over this threshold.

Plan 5

A new plan has been introduced by the Government that will only affect students in England. The plan will affect those who take out a loan from 1 August 2023.

The threshold on this plan is £25,000, employees will pay nine per cent on any amount over this threshold, however, the first repayment will be no earlier than the 2026/27 tax year.

Postgraduate loan plan

The postgraduate loan plan differs by country. In England and Wales, employees will pay 6 per cent on any amount they earn that is over £21,000. In Scotland, it is nine per cent on anything over £25,375, and in Northern Ireland, it is nine per cent on anything over £20,195.

Adding student loans to payroll

Employers must ensure that the correct repayment plan is administered for each employee. To do this, you should receive a student loan start notice (SL1) or postgraduate loan start notice (PGL1) from HM Revenue & Customs (HMRC).

If you do not receive these forms and the employee does not know which plan they fall under, ask them to visit the Government’s website for guidance on repaying student loans.

When processing payroll, include the loan deductions in the employee’s pay record. Ensure that the deductions are made after calculating National Insurance Contributions (NICs) but before calculating income tax. Report the deductions to HMRC through Full Payment Submission (FPS), which should be submitted on or before each payday.

Stopping student loan repayments

You may receive an SL2 or PGL2 stop notice from HMRC, requesting deductions to an employee’s salary to cease. In this situation, stop making deductions from the first available payday after the deduction stop date shown on the notice.

An employee cannot ask for student loan repayments to stop, this can only be requested by HMRC. You can ask the employee to contact the Student Loans Company if they feel they have overpaid.

With the correct information given by the employee and HMRC, managing student and postgraduate loans on payroll should be a pain-free process. Keep in mind the different plan structures, including the upcoming plan 5 in August 2023, and ensure payments are stopped when requested by HMRC.

For more information on managing student and postgraduate loans on payroll, please contact us.