How redundancy affects student loan repayments, severance pay deductions, managing unemployment periods, and financial strategy for job transitions
Facing redundancy while managing student loan debt requires understanding how unemployment affects your repayments and how to strategically use severance pay. Student loan deductions stop automatically when you lose employment, but they also apply to your final severance payment. Most people heading for 40-year write-off should prioritize emergency funds and living expenses over voluntary loan payments during unemployment.
Your severance package will have student loan deductions applied just like regular salary, taking 9% of the amount above the £25,000 annual threshold. For someone receiving £15,000 redundancy pay, approximately £1,350 goes to student loans. Once unemployed, repayments pause completely until you find new work—no need to notify Student Finance England as the PAYE system handles it automatically.
When you receive redundancy notice, take these steps within the first week to protect your finances:
Month 1 (Notice Period):
Upon Severance Payment:
Student loan repayments are handled automatically through PAYE:
Severance payments are treated as earned income for student loan purposes, meaning the 9% deduction applies just like regular salary.
| Severance Amount | Student Loan Deduction | Net After All Tax |
|---|---|---|
| £10,000 | £0 | ~£10,000 |
| £20,000 | £0 | ~£19,200 |
| £30,000 | £450 | ~£26,550 |
| £50,000 | £2,250 | ~£40,750 |
Note: First £30,000 of redundancy is typically tax-free. Student loans apply to total severance regardless of tax status. Income tax and National Insurance also deducted from amounts above £30,000.
Statutory redundancy (legal minimum):
Enhanced redundancy (many employers):
Student loan repayments stop automatically when employment ends. The PAYE system updates when your employer processes your P45, usually within days of your final payment.
| Starting Balance | 3 Months Unemployed | 6 Months Unemployed | 12 Months Unemployed |
|---|---|---|---|
| £30,000 | £30,300 | £30,600 | £31,200 |
| £50,000 | £50,500 | £51,000 | £52,000 |
| £70,000 | £70,700 | £71,400 | £72,800 |
Key insight: For most people heading to write-off, this balance growth is irrelevant—it all gets cancelled at 40 years. Unemployment actually saves money by pausing repayments that would have been written off anyway.
After redundancy, your severance payment should fund survival and job search, not voluntary student loan payments. Here's the priority order:
Priority 1: Emergency living fund (3-6 months)
Priority 2: Clear high-interest debt
Priority 3: Job search costs
NEVER: Voluntary student loan overpayment
Simple answer for 95% of redundant workers: No.
Never overpay if:
Consider overpayment only if:
Average UK job search takes 3-6 months. Your student loan remains paused throughout this period, providing one less financial stress during career transition.
Example: £35,000 pre-redundancy salary, received £25,000 severance after deductions
| Expense | While Employed | During Job Search |
|---|---|---|
| Housing | £850 | £850 |
| Food | £300 | £200 |
| Transport | £200 | £80 |
| Utilities | £150 | £150 |
| Entertainment | £200 | £30 |
| Student loan | £75 | £0 |
| Total monthly | £1,775 | £1,310 |
Severance runway: £25,000 severance ÷ £1,310 monthly = 19 months financial security (with extreme budgeting)
May be eligible for Universal Credit if severance depleted or was small:
When you start a new job, student loan repayments restart automatically through PAYE. Your new employer will receive notification from HMRC and begin deductions based on your new salary.
| Pre-Redundancy | New Job Salary | Change | New Monthly Payment |
|---|---|---|---|
| £35,000 (£75/mo) | £30,000 | -£5,000 | £37.50 |
| £35,000 (£75/mo) | £42,000 | +£7,000 | £127.50 |
| £45,000 (£150/mo) | £38,000 | -£7,000 | £97.50 |
How does 6 months unemployment affect your student loan trajectory?
If heading for write-off (most people):
If on full repayment track (high earners):
Use severance pay for emergency funds and living expenses, not voluntary loan payments. Repayments restart when you return to work, with no action required from you. For most people heading toward write-off, unemployment periods reduce total lifetime repayment.
UK Education Policy Specialist
With over 15 years of experience in UK education policy and student finance, Dr. Sharma founded Student Loan Calculator UK to help students navigate the complex world of student loans.