Student loan deductions: plans 1, 2, 4, 5 and postgrad explained

Student loan deductions are one of the most frequently misapplied elements of UK payroll. There are now five different repayment plans, plus a separate postgraduate loan repayment, each with its own threshold and deduction rate. Getting the plan wrong results in incorrect deductions — either taking too much from the employee's pay or failing to collect what is owed to the Student Loans Company.

HMRC notifies employers via the employee's tax code or a separate start notice which plan or plans apply to a given employee. It is the employer's responsibility to apply the correct plan and to act promptly when a notification arrives. Employers do not decide which plan applies — that is determined by when the employee started their studies and where they studied.

Plan 1 applies to students who started higher education before 1 September 2012 in England or Wales, or who started their course in Scotland or Northern Ireland before 1 September 1998 (for very long-service borrowers). The repayment threshold for 2025/26 is £24,990 per year. Deductions are 9% of earnings above the threshold.

Plan 2 applies to students who started an undergraduate course in England or Wales on or after 1 September 2012. This is the most common plan. The repayment threshold for 2025/26 is £27,295 per year. Deductions are 9% of earnings above the threshold.

Plan 4 applies to Scottish students who started their course on or after 1 September 1998. The threshold is £31,395 per year (2025/26). Deductions are 9% above the threshold. Note that Scottish students studying in England or Wales are on Plan 4, not Plan 2.

Plan 5 is the newest plan, applying to students who started an undergraduate course in England from 1 August 2023 onwards. The threshold for Plan 5 is lower in the early years — £25,000 per year — and graduates repay for a maximum of 40 years. The deduction rate is 9%.

Postgraduate Loan applies to students who took a postgraduate loan for a Master's or doctoral degree in England or Wales on or after 1 August 2016. The threshold is £21,000 per year (2025/26). Deductions are 6% of earnings above the threshold. An employee can be repaying both a Plan 1/2 loan and a postgraduate loan simultaneously — the deductions are calculated separately and combined.

In practice, the most common errors are: continuing to make deductions after receiving a stop notice from HMRC, failing to start deductions when a start notice arrives, and applying Plan 2 to a Scottish student who should be on Plan 4. If an overpayment occurs, the Student Loans Company refunds the employee directly — the employer does not need to manage the refund.

Deductions are calculated based on cumulative annual earnings, not the current period in isolation. For employees with variable pay, this means the monthly deduction may fluctuate significantly. A straightforward payroll system will handle this automatically.

See our PAYE explained guide for the full payroll framework, and running your first payroll for a step-by-step introduction to payroll setup including student loans.

Mellow handles all five loan plans and the postgraduate loan automatically, applying the correct threshold and rate for each employee. [Start a free trial →](https://mellowhr.com/register)