How the minimum wage increase could impact Student Loan Repayments and Payroll

The National Minimum Wage will rise to £12.21 per hour in April, offering a welcome pay boost for many workers.  

However, for graduates, this increase may bring the unexpected consequence of student loan repayments triggered by higher earnings.  

Employers, especially those managing payroll for graduates in non-graduate roles, need to be aware of these potential ripple effects. 

Understanding student loan repayments 

Graduates start repaying their student loans when their income exceeds specific thresholds, depending on the loan type.  

The repayment rate is nine per cent on any income above these thresholds: 

• Plan 1 – £24,990 per year 

• Plan 2 – £27,295 per year 

• Plan 4 – £31,395 per year 

• Plan 5 – £25,000 per year 

• Postgraduate Loans – £21,000 per year (six per cent repayment rate) 

While a graduate working 36.8 hours a week at the new minimum wage won’t typically exceed these limits, even a few hours of overtime could push their earnings over the threshold and trigger student loan repayments. 

The payroll impact on businesses 

Although the responsibility for repaying loans lies with employees, the changes can still affect businesses.  

Many graduates may not realise that overtime could reduce their take-home pay due to loan deductions.  

Combined with Income Tax and National Insurance, income above the threshold can face an effective tax rate of up to 37 per cent. 

This unexpected financial hit can lower morale, particularly among employees in non-graduate roles, and may lead to reluctance to take on overtime or dissatisfaction with their earnings.  

Employers managing payroll need to understand and address these concerns. 

What employers can do to support employees 

Employers can play a proactive role in reducing confusion and ensuring their payroll processes handle these changes effectively.  

Here are some steps to take: 

• Educate your workforce – Help employees understand how overtime impacts their earnings and may trigger student loan repayments. Communicate this during onboarding or performance reviews to build transparency and trust. 

• Provide financial support – Offer resources or workshops to help employees navigate deductions and repayment obligations. Highlight tax-efficient benefits like salary sacrifice schemes to ease financial strain. 

• Review overtime policies – Assess how extra hours affect payroll and employee earnings. Alternatives like flexible schedules or time-off-in-lieu can help employees avoid unexpected deductions. 

• Ensure payroll accuracy – Make sure your payroll systems are set up to manage student loan deductions correctly. Accurate calculations and transparent communication help minimise errors and maintain employee confidence. 

Balancing payroll and employee morale 

While the minimum wage increase boosts financial security, it also adds complexity to managing payroll and employee expectations.  

Employers must balance the benefits of higher wages with clear communication and supportive practices to maintain morale and productivity. 

If you are looking for advice on payroll management, tax planning, or handling student loan repayments, our team is here to help.  

Contact us today to ensure your business stays ahead of these changes.