Student loan deductions through payroll: the plan types

Student Loan Deductions Through Payroll: The Plan Types

Student loan deductions are one of those quiet payroll tasks that cause loud problems when they go wrong. Get the plan type wrong and you under-deduct (HMRC will notice) or over-deduct (the employee definitely will). Here is a practical guide to the plan types and what employers have to do.

Why the plan type matters

Student loan repayments are not one flat rule. HMRC operates several repayment plans, each with its own annual threshold and rate. Two employees on the same salary can owe completely different deductions depending on when and where they studied. The plan type comes from the employee or from HMRC; employers do not get to guess.

The four plan types

Plan 1

Plan 1 covers most borrowers who started their course before 1 September 2012 in England and Wales, plus all borrowers from Northern Ireland and Scotland regardless of start date. Deductions are 9% of earnings above the Plan 1 threshold, which the government sets each tax year.

Plan 2

Plan 2 covers most borrowers who started on or after 1 September 2012 in England and Wales, also at 9% of earnings above its own, higher threshold. A Plan 2 employee starts repaying later on the earnings scale than an equivalent Plan 1 borrower.

Plan 4

Plan 4 applies to borrowers from Scotland under the newer Scottish arrangements, at 9% of earnings above a Scotland-specific threshold. If you hire people who studied in Scotland, do not default them to Plan 1 out of habit. Plan 4 is its own plan with its own threshold.

Postgraduate Loan

Postgraduate Loans sit outside the numbered plans. Borrowers repay at 6% of earnings above the postgraduate threshold, and crucially, this runs alongside a numbered plan. An employee with both an undergraduate and a postgraduate loan can have two deductions from the same pay run. Many payroll errors come from recording only one of the two.

How employers find out the plan type

There are exactly two reliable sources, in this order:

  1. HMRC start and stop notices. HMRC issues a start notice (form SL1) when an employee becomes liable to repay, and a stop notice (form SL2) when deductions should end. If a start notice says Plan 1, the payroll record says Plan 1, whatever the employee said on day one.
  2. The starter checklist. For new starters, the HMRC starter checklist (which replaced the old P46) asks about student and postgraduate loans and the plan type. Use the answer there until HMRC tells you otherwise.

A P45 does not carry student loan plan information, so do not rely on it.

What employers actually deduct

Once the plan is recorded, payroll software does the maths:

  • Plans 1, 2 and 4: 9% of gross pay above the plan's threshold, pro-rated per pay period.
  • Postgraduate Loan: 6% of gross pay above the postgraduate threshold, in addition to any numbered-plan deduction.
  • Deductions continue until HMRC sends a stop notice or the employee leaves. Do not stop early because the employee asks you to.
  • Student loan deductions are separate from PAYE tax and National Insurance. They are not pension contributions and do not attract tax relief.

Reported figures flow through Full Payment Submission (FPS), so HMRC can reconcile what you deducted against what it expected.

Common errors payroll teams make

  • Recording the wrong plan type from a vague answer on day one and never correcting it when the HMRC start notice arrives.
  • Missing the postgraduate loan because the checklist question was skimmed and only the numbered plan was entered.
  • Defaulting Scottish borrowers to Plan 1 instead of Plan 4.
  • Deducting below the threshold when payroll software has not been updated with the new tax-year thresholds.
  • Ignoring start and stop notices sitting in an unread inbox.
  • Stopping deductions when the employee says the loan is paid off. Only a stop notice from HMRC ends the obligation.

A quick monthly routine

  1. Review new starter checklists for loan answers before the first pay run.
  2. Action HMRC start and stop notices the day they arrive.
  3. Confirm the new tax-year thresholds are live in your payroll software each April.
  4. Reconcile FPS student loan totals before submitting, and investigate any period where deductions drop to zero unexpectedly.

Student loan deductions are straightforward once the plan type is right. If payroll administration is eating time your team should spend on the business, Finex Outsourcing provides outsourced payroll alongside financial outsourcing services for UK businesses, and you can read more at finexoutsourcing.com.

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