STUDENT LOANS · 2026/27

The Graduate Tax Nobody Calls a Tax

Why your student loan repayments are not what you think they are — and why that matters more than most graduates realise

12 min read · Updated June 2026

When the student loan system was redesigned in 2012, the government faced a problem. They needed to charge graduates significantly more for their degrees than before. But calling it what it was — a tax on graduates, collected through PAYE for thirty years — was politically complicated.

So they called it a loan. They gave it an interest rate. They created a Student Loans Company. And they designed a repayment system that functions in almost every meaningful way like a graduate income tax, while carefully preserving the appearance of a conventional debt.

This distinction — between what student loans look like and what they actually are — is the most important thing to understand about them. Because once you understand it, a great deal about how repayments work, why overpaying is usually a mistake, and why the monthly figure on your payslip differs from what you calculated starts to make sense.

For most graduates, a student loan is not a debt in any conventional sense. It is a graduate income tax with a thirty-year term.

First: Which Plan Are You On?

Before anything else, you need to know which plan applies to you. The threshold above which you start repaying — and therefore the amount that comes off your payslip — varies significantly between plans.

Plan

Who it covers

Threshold 2026/27

Rate

Plan 1

England/Wales pre-Sept 2012 · Northern Ireland

£26,900

Plan 2

England/Wales Sept 2012 – July 2023

£29,385

Plan 3 / Postgrad

Postgraduate Master’s or Doctoral

£21,000

Plan 4

Scotland (SAAS loans)

£33,795

Plan 5

England from August 2023

£25,000

If you are not sure which plan applies to you, check your original loan documentation or log into the Student Loans Company portal. You can also look at your P60 or the deduction code on your payslip — it will show which plan HMRC is using.

If you have both an undergraduate and a postgraduate loan, both are deducted simultaneously through PAYE. You will see two separate deductions on your payslip: 9% above your undergraduate threshold and 6% above the postgraduate threshold, both calculated and applied at the same time.

Why the Number on Your Payslip Is Not What You Expected

Most graduates, if they think about their repayment at all, assume it is calculated like this: take annual salary, subtract the threshold, multiply by 9%, divide by twelve. It is a reasonable assumption. It is also wrong.

The actual method is more precise. HMRC calculates repayments monthly, based on that month’s actual earnings, and rounds down to the nearest pound. This is called the PAYE floor method, and the rounding happens every single month.

The PAYE floor method — a worked example:

Plan 2 borrower earning £35,000 per year:

Monthly earnings: £2,916.67

Monthly threshold: £29,385 ÷ 12 = £2,448.75

Amount above threshold: £467.92

9% of £467.92 = £42.11

Rounded down: £42 per month. Annual total: £504.

A simple annual calculation gives £505.35. The £1.35 monthly rounding difference is small individually but compounds across a career.

The rounding is always down, never up, and it happens twelve times a year. Over a full working career the cumulative effect of that rounding is meaningful — and it is one reason why the official projected repayment figures for any individual are estimates rather than certainties.

This is the correct HMRC methodology. It is how the WageLab calculator works. Many simpler calculators use the annual approximation, which produces a slightly different figure. For most purposes the difference is small. But if your payslip and your expectations are not matching, this is often the reason.

The Bonus Problem

The monthly calculation creates an effect that surprises almost everyone the first time it happens: the bonus spike.

Imagine you earn £32,000 a year as a Plan 2 borrower. Your normal monthly repayment is zero — £2,667 per month is below the £2,448.75 monthly threshold, so nothing is deducted. Then in March, you receive a £8,000 bonus.

Your March earnings: £10,667. Your March threshold: £2,448.75. Amount above threshold: £8,218.25. Nine percent of that: £739.64. Rounded down: £739.

You pay £739 in student loan repayments in a single month — out of an annual income on which, in a normal year, you would pay nothing at all.

This is mathematically correct. It is also one of the most jarring things a graduate can see on their first payslip after a bonus. The repayment is not wrong. But understanding why it happens makes it considerably less alarming.

A bonus does not just affect your tax. It can turn a month where you repay nothing into a month where you repay hundreds.

The annual total is not permanently distorted by this. By April, HMRC’s view of your full-year earnings is accurate, and the cumulative PAYE calculation corrects most timing differences. But the student loan deduction does not work cumulatively in the same way — each month is calculated on that month’s earnings, independently. The bonus repayment stands.

What Student Loans Do Not Do

A common misconception: student loan repayments reduce your tax bill.

They do not. Repayments are deducted from your net earnings through PAYE alongside Income Tax and National Insurance, but they are entirely separate from the tax calculation. Making a large student loan repayment saves you nothing in Income Tax or NI.

There is one indirect interaction worth knowing. If you contribute to a pension via salary sacrifice — the arrangement where your contractual salary is formally reduced before tax is applied — your student loan repayment base falls too. Your gross salary is genuinely lower, so the earnings on which student loan repayments are calculated are lower. This is a secondary benefit of salary sacrifice that most people have not considered.

For a Plan 2 borrower earning £36,000 and sacrificing £5,000 into a pension, the student loan calculation runs on £31,000 rather than £36,000. At 9%, that saves £45 per year in repayments — on top of the Income Tax and NI savings from the sacrifice itself. Small, but real.

When It Ends

Student loans are eventually written off. The timescale depends on the plan.

Plan 1: written off at age 65, or 25 years after the April you first became due to repay — whichever comes first.

Plan 2: written off 30 years after the April you first became due to repay.

Plan 4: written off at age 65, or 30 years after repayment started.

Plan 5: written off 40 years after repayment started.

Plan 3 / Postgrad: written off 30 years after repayment started.

These timescales have a significant implication that most borrowers do not fully absorb. The Institute for Fiscal Studies estimates that the majority of Plan 2 and Plan 5 borrowers will never repay their loan in full before it is written off. For these graduates, the loan is not a debt in any meaningful financial sense. It is a deduction from their income for a fixed period, calibrated to their earnings, that disappears at the end of the term regardless of the outstanding balance.

This is why the decision about whether to make voluntary overpayments to a student loan is more nuanced than it appears. For a borrower projected to repay in full, overpaying can save significant interest. For a borrower projected never to repay in full, voluntary overpayments disappear when the loan is written off — they reduce the outstanding balance, but since that balance would have been written off anyway, they produce no financial benefit.

The overpayment question:

Before making voluntary overpayments, the key question is: am I projected to repay this loan in full before it is written off?

If yes: overpaying can save interest.

If no: every voluntary pound you pay is a pound you did not need to pay. It reduces a balance that was going to disappear anyway.

This is not obvious. It requires knowing your loan balance, your expected salary trajectory, and the write-off date. A student loan calculator — or an adviser — can help you model it.

A Debt That Does Not Behave Like a Debt

Return to where we started. The reason the student loan system is so confusing is that it has been designed to look like a loan while functioning like a tax.

A conventional loan has a fixed monthly repayment. Miss a payment and there are consequences. Pay it off early and you save interest. The balance has real financial significance.

The student loan system has none of these features. Your monthly repayment changes with your income. Missing it is not possible — it is deducted automatically. For most borrowers, paying it off early is irrelevant because the balance will be written off before it reaches zero. The balance is, in a very real sense, a number that does not matter.

What matters instead is the monthly deduction — the percentage of income above the threshold that flows to the Student Loans Company rather than your bank account. That deduction will continue for as long as you earn above the threshold and until the write-off date arrives.

This framing changes how you should think about it. You are not managing a debt. You are managing a deduction. And the relevant question is not “how do I pay this off?” but “do I understand how the deduction is calculated and what affects it?”

Important: This article is for informational purposes only and does not constitute financial or tax advice. Based on 2026/27 HMRC rates and Student Loans Company thresholds which are subject to change. Individual repayment projections vary significantly depending on salary growth, interest rates, and plan-specific rules. Seek independent advice before making decisions about voluntary overpayments. WageLab is not FCA regulated.

Use the WageLab calculator to see how these tax rules apply to your specific circumstances.

WageLab is not FCA regulated and does not provide financial advice. This article is for informational purposes only. Full article content coming soon.