A student loan deduction can be one of the more confusing entries on a payslip.
The amount can change following a pay rise, overtime payment or bonus, while different employees may begin making repayments at different income levels. The interest charged to the loan is then managed separately by the Student Loans Company.
A new announcement covering student loan thresholds and interest rates gives employers another set of figures to prepare for. Here is the change explained without the payroll jargon.
The most important payroll change will arrive on 6 April 2027.
From that date, employees with a Plan 1 student loan will begin making repayments when their relevant annual earnings exceed £28,005. The current 2026/27 threshold is £26,900.
This does not mean everyone earning £28,005 receives the same deduction. Student loan deductions are calculated in each pay period, so the amount can vary when an employee receives overtime, commission, bonuses or irregular pay.
Once earnings pass the relevant threshold, the usual Plan 1 deduction is 9% of the amount above it.
Imagine an employee earns £30,000 consistently over the year and remains on Plan 1.
Using the 2026/27 annual threshold, the illustrative repayment would be:
Using the new £28,005 annual threshold:
That represents an illustrative reduction of £99.45 across the year.
Actual deductions may differ because payroll works on weekly, monthly or other pay-period earnings rather than performing one calculation at the end of the tax year.
There is no equivalent threshold increase for Plan 2 in this announcement.
The Plan 2 repayment threshold is £29,385 for 2026/27. Following the Autumn Budget 2025, the government is freezing it at that level for three years from April 2027.
That matters because pay may continue to increase while the repayment starting point stays still.
For example, if an employee receives an annual pay rise, a larger share of their earnings could sit above £29,385. Their deduction may therefore increase even though the repayment percentage remains at 9%.
This is sometimes described as “fiscal drag”. For the employee, the simpler explanation is that the threshold has not moved up with their salary.
The government has also published the student loan interest rates applying from 1 September 2026 to 31 August 2027.
They include:
The figures are based on an RPI measure of 4.1%. The 6% cap for Plan 2 and postgraduate loans limits the rate that would otherwise result from adding three percentage points to RPI.
The important point for employers is that these interest changes do not need to be calculated through payroll.
Payroll deals with deductions from pay. The Student Loans Company applies interest to the borrower’s account.
Employees may assume that a deduction should remain the same every month, particularly if their basic salary has not changed.
However, student loan deductions are normally assessed separately for each pay period. A higher deduction may appear when someone receives:
In most circumstances, payroll cannot simply reduce a valid deduction or spread it across future payslips because the employee would prefer a more consistent amount.
Employers should use the plan information provided through the employee’s starter declaration or an HMRC start notice.
If an employee believes they have been placed on the wrong plan, the employer should not select a different plan based solely on an informal request. The employee may need to check their online student loan account or contact the Student Loans Company so that the correct information can be passed to HMRC and payroll.
The same applies when an employee says their loan has been fully repaid. Payroll should generally wait for the appropriate stop instruction rather than ending deductions independently.
The new Plan 1 threshold is still several months away, but it should be included in preparations for the 2027/28 tax year.
For small businesses, charities, households and other employers, the priority is to make sure payroll software and processes are updated from the first relevant pay period beginning on or after 6 April 2027.
Employers do not need to become student finance experts. They do, however, need a payroll process that applies the correct threshold, follows HMRC instructions and gives employees a clear explanation when a deduction changes.
Zest Payroll provides friendly, straightforward payroll support for businesses, charities and domestic employers. We take care of the calculations, reporting and routine administration, leaving you with more time and fewer payroll headaches.