Student and postgraduate loan deductions must be carefully addressed in the ever-changing environment of UK payroll compliance. While thresholds and plan types may change each year, the principles for accurate deductions remain the same
This article outlines the general rules employers should always follow when handling student and postgraduate loan deductions and provides an update on the upcoming Plan 5, set to begin in April 2026.
Loan Plan Overview: An insight into the Loan Plan Structure
By 2026, HMRC will operate five different student and postgraduate loan repayment schemes, each with separate eligibility criteria and deduction thresholds. Until then, during the 2025–26 tax year, only four plans (Plans 1, 2, 4, and Postgraduate Loan) are active. Employers must ensure that the correct plan type is applied according to official HMRC records, not according to assumptions. For full guidance, visit the HMRC Student and Postgraduate Loan Deductions page on GOV.UK.
Present Loan Schemes:
Plan 1
It applies to undergraduate students in England and Wales (those who started their studies before 1 September 2012).
Threshold: £26,065 per year
Deduction Rate: 9% of income over the threshold
Plan 2
Applies to students from in England and Wales who have been admitted to undergraduate courses of study on or after 1 September 2012.
Minimum level: £28,470 a year
Deduction Rate: 9% of income above the threshold.
Plan 4
Applies to student loans in Scotland.
Threshold: £32,745 per year
Deduction Rate: 9% of income above the threshold
Plan 5 (New – Effective from April 2026)
Introduced for new students taking undergraduate or Advanced Learner Loan courses starting on or after 1 August 2023 in England.
Start Date of Deduction: April 2026 (beginning of the 2026–27 tax year)
Deduction Rate: 9% of income above the threshold (when live from 2026–27)
Further details can be found in the Student Loans: Terms and Conditions 2025 to 2026
Postgraduate Loan (PGL)
Applies to Master’s and Doctoral loans
Threshold: £21,000 per annum
Deduction Rate: 6% of income above the threshold
Employer Obligation:
Employers must confirm the correct loan plan for each employee using one of the following:
- The employee’s P45,
- HMRC SL1 or PGL1 notice, or
- The starter checklist (if no previous employment record is available).
Using the wrong loan plan type is one of the most common payroll errors. It can result in over- or under-deductions, employee complaints, and potential compliance issues with HMRC. Employers should therefore verify loan plan details carefully before processing payroll.
Summary Table Deduction Thresholds—2025–26
| Loan Plan | Annual Limit | Monthly Equivalent | Weekly Equivalent | Deduction Rate |
| Plan 1 | £26,065.00 | £2,172.08 | £501.25 | 9% over threshold |
| Plan 2 | £28,470 | £2,372.50 | £547.50 | 9% on threshold |
| Plan 4 | £32,745 | £2,728.75 | £629.71 | 9% over threshold |
| Plan 5 | NA (until 2026) | NA | NA | 9% (after 2026) |
| PGL | £21,000 | £1,750.00 | £403.85 | 6% over threshold |
Illustrative Example:
A Plan 2 employee earns £30,000 per year.
The amount deductible is calculated as:
(£30,000 – £28,470) × 9% = £137.70 per year
This equates to approximately £11.48 per month
Major Compliance Risks and How to Avoid Them
Improper deductions — whether over- or under-deductions — expose employers to both reputational and financial risks. Common mistakes include:
1. Failure to Apply HMRC Notices
Employers must not start deductions without the related SL1 or PGL1 notice. These documents provide official guidance on repayment obligations.
2. Incorrect Plan Classification
Under-deductions resulting from the misclassification of the employee plan (i.e., defaulting to Plan 1 when no plan is confirmed) can lead to significant losses. This often leads to matching issues during HMRC auditing.
3. Failure to Review Employee Declarations
Not processing starter checklists or P45 can result in missing or incorrect loan declarations, leading to compliance issues.
4. Continuing Deductions After a Stop Notice
As soon as the SL2/ PGL2 notice is received, the deductions should be stopped by the employer. A delay in stopping deductions may lead to employee complaints and result in overpayments.
Recommendation:
To maintain compliance and prevent deduction errors:
- Conduct quarterly internal audits of payroll deduction reports.
- Regularly cross-check HMRC communications (SL1, SL2, PGL1, PGL2).
- Ensure payroll staff are trained and kept up to date with current HMRC procedures and threshold changes.
Compliance-Support and Automation Tools
The use of modern payroll software can help reduce manual mistakes and ensures thresholds are automatically updated. Common tools include. Among the tools commonly used by UK employers are
● HMRC Basic PAYE Tools:
Simple software that allows for manual checks. It is free and suitable for small businesses.
● Auto-Updates Payroll Solutions:
These systems have versions that communicate with HMRC and automatically update thresholds based on the latest rules.
● SL1/PGL1 Import Tools:
Some payroll platforms can automatically import HMRC notices, ensuring faster and more accurate updates.
Frequently Asked Questions (FAQs)
Q: How to make sure I got the right loan plan on a new staff member?
A: Always check their starter checklist, P45, or the SL1/PGL1 notice. HMRC rules do not accept any guessing.
Q: Can an employee have both student and postgraduate loan deductions?
A: Yes. In this case, different deductions need to be calculated, 9% on the student loan and 6% on the postgraduate loan, as long as both limits are passed.
Q: What happens if the wrong type of loan plan was selected?
A: Extra payments must be returned quickly. If there was underpayment, then the employer is allowed to recover the amount slowly, as long as the employee agrees. Repeated mistakes may lead to fines.
Q: Are there deductions during unpaid leave or when hours are reduced?
A: No, repayments are only taken when the employee’s pay goes above the threshold for that pay period.
Employer Strategies
To achieve long-term accuracy and keep employee payments correct:
● Centralise Documentation:
Ensure all starter forms and HMRC notices are stored securely in one place for quick access.
● Add Quality Controls:
Regularly review deduction entries, particularly after onboarding new employees or updating records.
● Support Clear Payslips:
Each payslip should clearly display deduction details to prevent confusion or disputes.
● Stay Updated:
Subscribe to HMRC’s Employer Bulletin and assign someone on your team to follow regulation updates.
How The Infinity Group Can help
At The Infinity Group, we specialise in umbrella and payroll management services that help UK businesses stay fully compliant with HMRC regulations.
Whether you prefer to be the employer and manage your own workforce or would like us to act as the employer under our umbrella service, we ensure that all payroll obligations, including student and postgraduate loan deductions, are handled accurately and on time.
Our experienced team provides end-to-end payroll management, compliance checks, and up-to-date guidance so you can focus on running your business with confidence.
If your organisation needs reliable support with payroll compliance or is exploring the benefits of using an umbrella arrangement, The Infinity Group is ready to assist.