Student Loan Repayments: A Payroll guide
28 Feb 2024University can be a great time, but repaying the student loan debt certainly isn’t.
For a bit of background information, the average graduate accumulates £45,000 in student loan debt. Great.
However, lucky for the average grad, they don’t have to repay it all at once. Nice.
So, what’s the deal with student loans?
Repaying student loans
As mentioned, a graduate doesn’t pay their student loans back straight away, most student loans only need to be paid back once the graduate has hit the salary threshold on their loan plan.
A ‘plan’ and ‘threshold’ are the same. The plan simply refers to the earnings threshold someone must hit before they start paying their loan back unless referring to a postgraduate plan, which we’ll get into later.
Once someone does hit their threshold, they’ll start repaying a percentage (usually 9%) of anything they’ve earned over the threshold.
The percentage paid back by graduates gets calculated before tax.
Here’s the example provided by the gov.uk website:
You’re on Plan 1 and have an income of £33,000 a year, meaning you get paid £2,750 each month.
The plan 1 earnings threshold is 22,015 a year or £1,834 a month.
Calculation:
£2,750 – £1,834 (your income minus the Plan 1 threshold) = £916
9% of £916 = £82
This means the amount you’d repay each month would be £82 and £984 a year.
Types of student loan plans and upcoming changes.
In the UK, there are five different student loan repayment plans. In these examples, we’ll use a graduate earning a salary of £30,000 a year, as our test subject.
Student Loan Plan 1
Plan 1 is for the graduates who started a course before 1st September 2012, the threshold is £22,015 and is paid at 9% over this threshold.
Example:
£30,000 is £2,500 a month minus the £1,834 threshold, which equals £666 (that’s not good), if we then take 9% off, we get £59.94 a month and therefore, £719.28 a year.
However, there will soon be an increase in the student loan threshold for plan 1 to £24,999. The change to the threshold comes due in part to the changes to minimum wage, putting the average 40-week worker on £23,795.20 a year.
So here is the example with the new threshold.
Example:
£2,500 a month – 2083.25 = 416.75
9% of 416.75 = 37.51 a month
*12 months = 450.09 a year
Student Loan Plan 2
Plan 2 is for the graduates who started a course after the 1st of September 2012 and up to the 31st of July 2023. Plan 2’s threshold is £27,295 a year and paid back at 9% over that threshold.
Example:
£2,500 a month – £2,274 = £226.
9% of £226 = £20.28 a month
*12 months = £243.36 a year.
Student Loan Plan 4
Plan 4 is for the graduates who started a course after applying to the student awards agency Scotland and has a threshold of £27,660 and paid at 9% over that threshold.
Example:
£2,500 a month – £2,305 = £195.
9% of £195 = £17.52 a month
*12 months = £210.24 a year.
However, from April 1st 2024 the new threshold will become £31,395. This means that with our example of £30,000 a year, you will have to pay nothing back.
Student Loan Plan 5
Plan 5 is for the graduates who started a course after 1st August 2023 and has a £25,000 threshold, and again, only 9% of every penny over that threshold is paid.
Note that students on repayment plan 5 will not need to start repaying anything till April 1st 2026, even if they drop out.
Example:
£2,500 a month – £2,083 = £417
9% of £417 = £37.44 a month
*12 months = £449.28 a year
Postgraduate loan
So what about people who went down the route of post-graduate courses? Well, let’s dive in.
Postgraduate loans are usually for those who’ve done a master’s degree (Level 7 qualification) any time after their Level 6 degree (standard diploma).
Unlike undergraduate loans at 9%, postgraduate loans only charge for 6% of everything you earn over the threshold. However, the 6% you pay goes on top of the 9% you’re already paying with the undergraduate loan.
Therefore, with a postgrad and undergrad loan, you could be paying a whopping 15% if you’re sitting comfortably above both thresholds. Note that the different loan debts you repay aren’t combined, you pay them back separately but brought out of your payslip at the same time, see the example below.
So, what is the post-graduate threshold? The current threshold is £21,000.
So, let’s say you have both a plan 2 student loan and a postgraduate loan with our £30,000 example.
Example:
£2,500 – (Undergraduate loan plan 2 threshold) £2,274 = £226
£2,500 – (Postgraduate loan threshold) £1,750 = £750
9% of £226 = £20.34
6% of £750 = £45
£45 + £20.34 = £65.34 per month
£65.34 *12 months = £784.08 per year
MoneySavingExpert has broken down how much you’ll pay a year on the most common repayment plans with a postgraduate loan on top.
Write off’s
With the amount of debt students are racking up it would seem near impossible to ever pay it back. However, it’s important to note that different plans also have write-off periods that once you hit you will no longer have to pay back student loan debt.
The countdown to the write-off period begins when you first hit the threshold to begin repaying your student loans. So, let’s quickly break them down using the information from the government website.
Plan 1:
If you were paid the first loan on or after 1 September 2006 the loans for your course will be written off 25 years after the April, you were first due to repay.
Or
If you were paid the first loan before 1 September 2006 the loans for your course will be written off when you’re 65.
Plan 2:
Is written off 30 years after the April you were first due to repay.
Plan 4:
If you were paid the first loan on or after 1 August 2007 the loans for your course will be written off 30 years after the April you were first due to repay.
Or
If you were paid the first loan before 1 August 2007 the loans for your course will be written off when you’re 65, or 30 years after the April you were first due to repay – whichever comes first.
Plan 5:
Is written off 40 years after the April you were first due to repay.
Postgraduate loans:
If you’re a student from England or Wales, your Postgraduate Loan will be written off 30 years after the April you were first due to repay.
Postgraduate students from Northern Ireland, are on Plan 1.
Postgraduate students from Scotland, are on Plan 4.
What role does payroll play?
So, as you may know by now if, in standard employment, the undergraduate/postgraduate doesn’t pay back their student loan themselves, it’s automatically taken out of their pay by payroll.
So how does this work?
When you hire a new employee, you’ll have to account for any student loan deductions in the same way you would for national insurance contributions.
If an employee is joining you from a different role, their repayment plan will be outlined in their P45.
Otherwise, HMRC will send an SL1 and or PGL1 start notice to notify payroll it’s time to start deducting student loans.
In some instances, there can be other factors impacting how the employee repays their student loan.
Note that you’ll need to adjust an employee’s student loan repayments as their salary changes, this includes bonuses.
Once deductions begin it’s the responsibility of the payroll department or business owner to make clear to the employee the types of deductions they will face.
All deductions will be noted in the employee’s payslip. Employees may need this information if they’ve been granted a bonus for a particular period (let’s say, for example, March) which has taken them over the threshold for their loan.
Because student loan repayments are calculated yearly but taken monthly, in some instances, an employee can go over the threshold for one month, but not the whole year.
Sometimes, a student loan repayment can be deducted from an employee’s paycheck when they haven’t reached the yearly threshold.
Final thoughts
All in all, student loan repayments are a relatively simple process for employers, but it can be time-consuming.
If, as a small business owner, you’ve hired or are planning on hiring a lot of graduates, many decisions around payroll and employee benefits will need to be managed appropriately.
If you need support managing the payroll side of your business get in touch with our payroll team, for expert advice and guidance.
Lastly, if you’re currently paying back your student loans and want a better of what you’re paying to HMRC, check out our earnings before tax blog.
Get a full breakdown of everything involved in paying staff and getting paid as an employee in our Guide to Payroll.
