Published: June 2026 | Fact-Checked & Audited By: David Vance, CTA FCA (Chartered Tax Advisor & Accountant)
This guide is fully updated for the 2026/27 HMRC tax year. All calculations and tax rules have been audited against official UK legislation.
For millions of UK graduates, student loans are an ongoing deduction on their monthly payslips. Unlike commercial loans, UK student loans are repaid as a percentage of your income above a specific threshold. While this protects low earners, it has a major side effect for graduates receiving pay rises. Because student loan repayments are calculated on gross income, a salary increase triggers higher repayments. When combined with Income Tax and National Insurance, your student loan deductions can push your marginal deduction rate to levels that rival or exceed those of the highest earners in the country.
Understanding Your Student Loan Plan
The rate at which you repay your student loan—and the threshold at which repayments begin—depends on when you started your studies and your location. For the 2026/27 tax year, the plan types are as follows:
- Plan 1: Pre-2012 students (England/Wales) and all Scottish/Northern Irish students. Repayments are 9% of income above £26,065.
- Plan 2: 2012-2023 English and Welsh students. Repayments are 9% of income above £27,295.
- Plan 4: Scottish students (post-2021 threshold rules). Repayments are 9% of income above £31,395.
- Plan 5: Post-September 2023 English students. Repayments are 9% of income above £25,000.
- Postgraduate Loan: Master’s or Doctoral students. Repayments are 6% of income above £21,000.
The Impact on Your Marginal Rate
Because student loan repayments are 9% of gross income above the threshold, any pay rise above your plan’s threshold is hit with a flat 9% deduction. This means you must add 9% to your marginal tax rate. For a basic rate taxpayer in England (20% tax + 8% NI = 28%), adding a Plan 2 student loan increases the marginal deduction rate to **37%**. For a higher rate taxpayer (40% tax + 2% NI = 42%), a student loan pushes the marginal deduction rate to **51%**. If you hold both an undergraduate and a postgraduate loan, your combined student loan deduction rate is 15%, resulting in a massive **57%** deduction rate for higher-rate earners.
Comparing Take-Home Pay With and Without Student Loans
Let us look at a graduate earning £35,000 who receives a £4,000 pay rise. Let us compare the tax and loan deductions for this raise under Plan 2:
| Deduction Type | Without Student Loan | With Plan 2 Student Loan (9%) |
|---|---|---|
| Gross Pay Rise | £4,000 | £4,000 |
| Income Tax (20%) | -£800 | -£800 |
| National Insurance (8%) | -£320 | -£320 |
| Student Loan Repayment (9%) | £0 | -£360 |
| Net Pay Rise Kept | £2,880 | £2,520 |
| Effective Marginal Deduction Rate | 28% | 37% |
To model how your student loans and salary increases interact to affect your monthly take-home pay, use our Salary Calculator.
Frequently Asked Questions: Pay Rises & Student Loans
1. Does a pay rise increase my student loan repayments?
Yes, student loan repayments are calculated as a percentage of your gross earnings above a specific threshold, so a pay rise will directly increase your monthly deductions. The repayment rate is 9% for undergraduate plans and 6% for postgraduate plans.
2. What is the repayment threshold for Plan 2 student loans in 2026/27?
The repayment threshold for Plan 2 student loans is £27,295 for the 2026/27 tax year. You pay 9% on any gross earnings above this amount.
3. Can I pay off my student loan early to avoid the pay rise deduction?
You can make voluntary prepayments to clear your loan, but for most Plan 2 and Plan 5 graduates, the loan is written off after 30 or 40 years, meaning early repayment may not be cost-effective. Consult a financial advisor to calculate if clearing your balance makes sense based on your career path.
4. How do undergraduate and postgraduate loans combine?
If you have both undergraduate and postgraduate loans, you repay them concurrently: 9% for the undergraduate loan and 6% for the postgraduate loan, totaling a 15% combined marginal deduction. This applies to all income above their respective thresholds.
5. Does salary sacrifice reduce my student loan repayments?
Yes, salary sacrifice arrangements (like pension sacrifice or company car schemes) reduce your gross taxable pay, which automatically lowers the earnings figure used for student loan repayments. This is a key way to mitigate graduate marginal deduction rates.
6. What happens if my income falls below the threshold in a future month?
Student loan repayments are calculated on a pay-period basis (weekly or monthly), so if your income drops below the threshold in a given period, deductions will automatically stop. If you earn less than the annual threshold over the full year, you can claim a refund from the Student Loans Company.
7. Why is my student loan deduction higher on a backdated pay rise?
Because student loans are calculated per pay period, a backdated pay rise paid as a lump sum will artificially inflate your earnings for that month, triggering a much larger deduction. You can request an annual recalculation if this causes your total repayments to exceed 9% of your annual income above the threshold.
8. When are UK student loans written off?
Plan 1 loans are written off at age 65 or 25 years after graduation depending on when they were taken out; Plan 2 loans are written off after 30 years; Plan 5 loans are written off after 40 years. Any remaining debt is cancelled with no tax penalty.
9. Do student loan deductions appear on my P60?
Yes, your P60 documents the total student loan repayments deducted by your employer over the course of the tax year. This is used by HMRC to reconcile your account balance.
10. Does a pay rise increase the interest rate on my student loan?
For Plan 2 loans, the interest rate is linked to inflation (RPI) plus a variable rate of up to 3% depending on your income. A pay rise that pushes you above the lower threshold will increase the interest rate applied to your outstanding balance.