From April 2026, a new student loan repayment system, called Plan 5, will affect payroll for any employees who have started their courses on or after 1 August 2023.
This new repayment plan introduces lower income thresholds than previous student loan categories.
This means that many employees, including those on lower wages, will become liable for student loan deductions earlier in their careers.
Employers must understand how Plan 5 operates and how it will affect their payroll processing and budgeting.
What is Plan 5 and how does it work?
Plan 5 is the newest repayment band created by the Student Loans Company (SLC) and will apply to those who have started or completed any undergraduate or advanced learner loan courses.
It has the lowest repayment threshold of all current plans and ensures that most employees working full-time will repay their student loans.
Repayments begin when an employee’s income reaches any of the following thresholds:
Once an employee’s income reaches these levels, repayments will be deducted automatically through payroll.
If their income drops below the threshold, due to reduced hours or a period of unpaid leave, for example, the SLC will automatically stop collecting repayments and resume only when the threshold is reached again.
How will employees be charged?
Repayments under Plan 5 are set at 9 per cent of income above the threshold.
Employers must calculate these deductions through payroll and for self-employed individuals, they will be collected through Self Assessment.
The lower threshold may result in employees on or near the National Living Wage (NLW) finding themselves required to repay.
If wage growth continues to rise at its current pace, many full-time workers earning NLW from 2026 onwards will surpass the £25,000 threshold and become liable for repayments.
Why is Plan 5 causing concern?
Traditionally, student loan repayments were associated with graduate-level salaries.
However, the combination of low repayment thresholds and rising NLW means that repayments will increasingly be activated for employees in entry-level or non-graduate roles.
This will reduce the take-home pay for many individuals who may already be facing financial pressures.
For employees, this creates new payroll compliance challenges, particularly for businesses with large numbers of lower-paid employees.
Incorrect thresholds or misapplied deductions could result in financial errors and HMRC penalties, so employers must promptly seek support on how to update their payroll system.
How can employers prepare?
Employers should begin by reviewing their payroll systems so that Plan 5 is recognised and processed correctly from April 2026.
Employee records should be monitored closely and new starter documentation should be updated so that the appropriate repayment plan is applied.
Employers should also communicate the changes to the affected employees so they understand when deductions may begin and how their take-home pay will change.
Workforce budgeting and cash flow forecasting should be reassessed and our legal team can help you understand the potential increase in payroll administration.
How can we help with your payroll systems?
Employers and payroll teams have a responsibility to set up accurate Plan 5 deductions and ensure their payroll processes remain compliant.
Our financial team can help your business understand the impact on employee net pay and how the student loan repayment systems affect your payroll.
With our payroll expertise, we can help you prevent costly errors and give employers the confidence that their obligations are being met accurately.
Contact our team to find out more about our payroll services.
