May 15, 2021

How to apply student loan banding to employee pay

Your employee might be young enough to be in a higher repayment scheme, have PHD’s coming out of their ears, or maybe they have multiple loans to repay. Whatever the circumstance, whatever the repayment, this information impacts your payroll.

Read on to find out how to apply student loans to your payroll, and important information you need to be aware of.

How do I know if I need to take student loan payments from my employee?

It’s worth noting when taking on a new employee that it is your responsibility to make student loan deductions if any of the following apply to your new starter:

  • Your new employee has a P45 that shows that deductions should continue
  • Your new employee has told you they’re repaying a student loan, or postgraduate loan. It might be useful to include this in your starter checklist. Check out our tips for a great (and legally compliant) induction process
  • You have been sent a SL1 form or a PGL1 form by HMRC, and your employee earns over the income threshold for their loan

How to apply student loans to payroll

Now the important bit. How does that impact your payroll? Even if you’ve had an employee’s P45 from their last role, you should follow the steps below, just to be on the safe side.

Kick off by asking your employee if they have either a student loan, or postgraduate loan. It’s important to note that some employees will have both. If your employee finished their studying after 6 April in the current tax year then they won’t start to repay their loan until the next tax year. Yippee for them.

Once you’ve got this information, you’ll want to make sure it is recorded and in your payroll software. If you’re migrating from one system to another is it recommended that you pay special attention to this data transfer in the migration process. Clever payroll software will make this calculation for you, so you don’t need to calculate loan recover repayments.

How do I know what deductions to apply to an employee?

If your employee has a student loan, you can ask them to check which repayment plan they should be on in their repayment account. If your employee is still not sure what plan they should be on they can contact the Student Loans Company and get access to this information.

If as an employer you still don’t have access to this information and your payroll needs to be run, you should use Plan 1 in your payroll software until you get a student loan start notice (SL1).

In some instances, your employee might be on more than one plan. Where that is the case you should start deductions for the plan with the lowest recovery threshold until you get an SL1. If you’re not sure, check student loan recovery thresholds here.

Special rules and stopping payments

Once setup in your payroll software more times than not you won’t need to make further adjustments. However, if you need to stop making deductions to employee pay, then HMRC will tell you. They will send you a SL2 form for student loans, and a PGL2 form for postgraduate loans.

There are some special rules that might impact student loan deductions, examples include:

  • A court order advising a debt needs to be directly collected from your employees’ earnings
  • You change how often you pay your employee (e.g from weekly to monthly)
  • Your employee has more than one job with you as a business and you need to aggregate earnings

Searching for payroll software that does the heavy lifting when it comes to calculations? Step right this way. Check out our guide to great payroll software to see how your software measures up.

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About the author

Diane Thames

About the author

Diane Thames

Diane Thames is a Payroll Team Manager here at Moorepay. She has been with Moorepay for over 20 years helping our customers with their payroll, and as such is a seasoned expert on everything payroll: from complicated calculations to the latest legislation.

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