Student loans for UK contractors: plans, multi-plan rule, how to pay

Which plan are you on?

Five active plans for UK student loans. Which one(s) you hold depends on where you studied, when you started, and whether you took postgraduate study. Check your Student Loans Company online account if you're unsure.

Frozen vs uplifted: Plans 1, 2, and 4 thresholds are uplifted annually by RPI. Plans 5 and Postgrad are frozen, Plan 5 at £25,000 for the entire loan duration, Postgrad at £21,000.

How repayments work mechanically

Your student loan is repaid as a percentage of income above the threshold, NOT a percentage of total income. If you're on Plan 2 (£29,385 threshold) and earn £40,000, you pay 9% × (£40,000 − £29,385) = £955 per year, or about £80/month.

For employees on PAYE (including umbrella contractors), HMRC computes the deduction monthly and your employer takes it off your payslip. For Ltd directors taking dividends and sole traders, the deduction happens at year-end via self-assessment, you settle the balance by 31 January following the tax year.

The threshold is in gross taxableterms. Personal allowance, pension contributions, and other tax deductions don't reduce the income SL is calculated on. Salary sacrifice into pension IS an exception, because it reduces your gross taxable salary at source, so SS pension contributions save 9% of student loan in addition to the income tax + NI savings.

The multi-plan rule (one 9%, not two)

The bit most online calculators get wrong: holding multiple undergrad plans does NOT mean you pay 9% twice. HMRC takes ONE 9% deduction at the LOWEST threshold among the plans you hold. The Student Loans Company allocates the resulting payment between your plans internally.

So if you hold both Plan 1 (threshold £26,900) and Plan 2 (threshold £29,385) at £40,000 income, your single undergrad deduction is 9% × (£40,000 − £26,900) = £1,179 — using the lower Plan 1 threshold because that's what HMRC's rule defaults to.

Postgrad is the exception. The 6% Postgrad deduction is always in addition to any undergrad deduction. Someone with Plan 2 + Postgrad at £40,000 pays:

• Undergrad: 9% × (£40,000 − £29,385) = £955
• Postgrad: 6% × (£40,000 − £21,000) = £1,140
• Total: £2,095/year (effective 5.2% on gross)

Maximum combined rate from student loans is 15% (9% undergrad + 6% Postgrad) on income above the higher of the two thresholds, but only if you hold both an undergrad plan AND Postgrad.

Try it with your income

Pick your plan(s) and enter your annual income. The calculator handles the multi-plan rule automatically and shows the band-by-band maths plus a sensitivity table at different income levels.

If you're umbrella

Student loan deduction comes off your payslip every month, same as for permanent employees. The income figure SL is calculated on is your gross taxable salary AFTER the umbrella's margin and employer NI come out, i.e. the figure shown as "gross" on your payslip, not the assignment rate.

For a £500/day contractor working 220 days/year via umbrella, the gross taxable salary is roughly £85,000 (net of margin and ER NI). On Plan 2 the SL deduction is 9% × (£85,000 − £29,385) = £5,005/year, deducted in 12 monthly chunks of ~£417. This is significant, about 6% of your net take-home, so it's worth modelling alongside the tax + NI deductions when comparing offers.

Salary sacrifice helps here. Sacrificing £10,000 into pension (umbrella mode) reduces gross taxable by £10,000, saving 9% × £10,000 = £900 of student loan in addition to the income tax + NI savings. The umbrella calc shows this as a separate line.

If you run a Ltd company

Two routes for student loan repayment via a Ltd:

1. From your director salary(PAYE): if you take the typical £12,570 salary, that's below every undergrad threshold, no SL deduction at source.
2. From total income via self-assessment: HMRC includes both salary AND dividends in your SL income for the year. You settle the balance via your annual self-assessment return, usually a single payment by 31 January following the tax year.

For a Ltd director on £12,570 salary + £45,000 dividends (Plan 2, total income £57,570): SL repayment is 9% × (£57,570 − £29,385) = £2,537/year, paid as part of the self-assessment bill alongside income tax and NI on the dividends.

The cash-flow surprise.If you switch from PAYE to Ltd contracting in October, you stop the monthly SL deduction immediately, but you'll owe about a year's worth of dividend-based SL repayment in January. New Ltd directors often miss this in their cash-flow planning. Set aside ~9% of dividends taken beyond the PA throughout the year to cover the SA bill.

Dividends and student loans

Yes, dividends count toward income for student loan purposes. HMRC's definition of income for SL is total income on self-assessment, salary + dividends + any other taxable income (rental income, savings interest, self-employment profit). They are NOT included in the SL calculation for NI purposes (NI is salary-only), but they ARE included for student loan.

Practical implication: a Ltd director who takes dividends up to the £100,000 personal-allowance taper threshold pays roughly 9% × (£100,000 − threshold) of student loan on top of all the dividend tax. For Plan 2 holders that's (£100,000 − £29,385) × 9% = £6,355/year of student loan, settled via self-assessment. This SL bill alone, separate from income tax, NI, dividend tax, and corporation tax — can be a five-figure annual line item for higher-earning graduate Ltd directors.

The dividend tax calculator lets you select your student loan plan(s) and surfaces the SL repayment as a separate line. The salary–dividend split optimiser also accounts for SL when finding the optimal director salary level.

Voluntary overpayments, worth it?

For most UK graduates, NO, voluntary overpayments rarely make sense. Three reasons:

1. Write-off after 25 / 30 / 40 years. Plan 1 writes off after 25 years; Plans 2, 4, and Postgrad after 30; Plan 5 after 40. A large fraction of borrowers, particularly Plan 5 and Postgrad holders — never repay the full balance plus interest before write-off. Overpaying brings forward repayment of money that would have been forgiven anyway.
2. Interest is income-banded.Lower earners pay roughly RPI; higher earners pay up to RPI + 3%. Even at RPI + 3%, the real cost of the loan isn't outsized compared to other forms of personal borrowing.
3. Better use of cash elsewhere.ISA contributions, pension contributions, mortgage offset, or business reinvestment usually have higher risk-adjusted returns than overpaying student loans — especially given the loan's asymmetric upside (you keep paying the full 9% above threshold either way until the balance hits zero, but stop paying entirely if it writes off).

Exceptions where overpayment makes sense: consistently very high earners (£80k+ throughout your career) who will clear the balance well before write-off and benefit from extinguishing the interest charge; or short-balance edge cases where a £500 overpayment now avoids a year of 9% SL deduction. The MoneySavingExpert student loan calculator (mse.me/student-finance) is the standard tool for modelling your specific case.

Frequently asked questions

Which plan am I on?

Look at your Student Loans Company online account or your most recent annual statement. As a quick proxy: Plan 1 is for English/Welsh students starting before September 2012 (and Northern Ireland students of any era), threshold £26,900 for 2026-27. Plan 2 covers English/Welsh students from Sept 2012 to July 2023, threshold £29,385. Plan 4 is Scottish students from Sept 1998 onwards, threshold £33,795. Plan 5 covers English students from August 2023, threshold £25,000 (the lowest). Postgrad covers Master's and PhD loans from August 2016, threshold £21,000 at 6%. If your loan straddles multiple periods (study, top-up, postgrad) you may be on more than one plan simultaneously.

Why is repayment 9%, what does it actually mean?

It's 9% of EVERY POUND of income above your threshold, NOT 9% of total income. So someone earning £1,000 above the threshold pays £90/year, not £90/month. The deduction is taken at source via PAYE for employees (including umbrella contractors) and via self-assessment for the self-employed and Ltd directors taking dividends. Postgrad is structurally identical but at 6%. The rate is fixed, there's no progression to a higher band. What scales is the income above threshold.

Is the £29,385 (Plan 2) the gross or net figure?

Gross. The threshold is gross taxable income before any deductions. For PAYE employees that's gross salary. For Ltd directors with dividends it's salary + dividends combined (HMRC includes both). For umbrella contractors it's the gross taxable salary AFTER the umbrella's deductions (margin, ER NI, salary-sacrifice pension), which is the figure on your payslip. Don't subtract personal allowance or pension contributions before applying the threshold, student loan ignores those.

What if I have both undergrad AND postgrad loans?

You pay 9% on the undergrad portion (above the lowest undergrad threshold you hold) AND a separate 6% on the postgrad portion (above £21,000). They're stacked, not combined: someone with both a Plan 2 undergrad and a postgrad loan pays 6% above £21,000 + 9% above £29,385. At £40,000 income that's: 6% × (40,000 − 21,000) = £1,140 postgrad + 9% × (40,000 − 29,385) = £955 undergrad = £2,095 total. Maximum effective combined rate is 15% (9% + 6%), only on income above the higher of the two thresholds.

I'm switching from PAYE to Ltd contracting, does the SL stop?

It changes how you pay, not whether you pay. Under PAYE the deduction comes off your payslip automatically. As a Ltd director taking £12,570 salary + dividends, the salary alone won't trigger SL (below all thresholds). But your dividends count toward total income for SL purposes, you settle the resulting balance via self-assessment by 31 January following the tax year. HMRC does the multi-plan calculation automatically; your accountant or the SA tax-return software handles the form. Don't be surprised by a one-off SL bill in January if this is your first year as a Ltd director with significant dividends, it's NOT being deducted in real time.

How does student loan interact with umbrella and salary sacrifice?

Salary sacrifice into pension reduces your gross taxable salary, which reduces the income SL is computed on. Sacrificing £5,000 of a £40,000 salary saves £450 of SL repayment (Plan 2: 9% of £5,000) on top of the income tax + NI savings. For Plan 5 holders earning above £25,000 the saving is the same percentage but kicks in at lower incomes. Use the salary-sacrifice pension calculator to see the combined effect, student loan saved is one of the line items. Note: in umbrella mode, the sacrifice is from gross taxable salary AFTER umbrella's margin and ER NI, not from the assignment rate.

When does the loan get written off?

Different per plan. Plan 1: 25 years after first April you became eligible to repay (usually the year you started repaying via PAYE). Plan 2: 30 years from when you became eligible to repay. Plan 4: 30 years. Plan 5: 40 years (the longest, the trade-off for the lower £25k threshold and 9% rate). Postgrad: 30 years. After write-off you owe nothing further on that plan. Many borrowers, particularly Plan 5 holders, will never repay in full because the 40-year clock runs out before the balance plus interest is cleared. The interest charged is roughly RPI for low earners and RPI + up to 3% for higher earners, depending on plan and earnings band.

Should I make voluntary overpayments?

Usually NO, for most graduates. The loan write-off after 25/30/40 years means many borrowers never pay back the principal in full anyway. Voluntary overpayments only make sense if you're confident you'll repay the full balance plus all accrued interest before write-off, only consistently high earners (£60k+ throughout their career). The Money Saving Expert calculator (mse.me/student-finance) is the standard tool to model your specific case. For most contractors, 9% on income above threshold is a marginal-rate-only cost; treating it as 'just another tax' until write-off is rational.

Is the threshold updated every year?

Plans 1, 2, and 4 thresholds are uplifted annually by RPI; Plans 5 and Postgrad are FROZEN. The 2026/27 thresholds (Plan 1 £26,900, Plan 2 £29,385, Plan 4 £33,795) reflect this year's RPI uplift. Plan 5 is fixed at £25,000 for the duration of the loan; Postgrad is fixed at £21,000. The freeze on the lowest-threshold plans means more income falls above the threshold each year, increasing repayments in real terms, a deliberate fiscal-drag policy.

Can I deduct student loan repayments from my tax bill?

No, student loan repayments are not tax-deductible against any income tax, NI, dividend tax, or corporation tax line. They're a separate quasi-tax administered through PAYE / self-assessment. The repayments don't appear in your CT600 or self-assessment tax computation; they're an additional deduction on top of the tax bill. Your accountant treats them as a personal-side payment, not a company-side expense.