Redundancy and Student Loan Repayments: What Changes
Genuine redundancy pay is not counted as earnings for student loan deductions, so your employer should not take 9% (6% for a Postgraduate Loan) from it. Your final wages, bonuses and other pay that is earnings still count.
What happens to your student loan repayments when you are made redundant: severance pay deductions, when repayments stop, and managing a period out of work
Which plan do the examples assume? The worked examples on this page assume a Plan 5 loan (repayment threshold £25,000). If you are on Plan 1, Plan 2, Plan 4 or a Postgraduate Loan, your threshold and write-off date are different, so adjust the figures: see all the repayment plans or check which plan you are on.
Key Takeaways
- Student loan repayments stop automatically when employment ends — your employer's P45 triggers the PAYE update within days, and you pay nothing while unemployed regardless of your outstanding balance.
- Genuine redundancy pay is not counted as earnings for student loan deductions. HMRC's Collection of Student Loans Manual (CSLM17055) lists “Redundancy Payments” and “Damages for breach of contract on dismissal” as income that is not earnings for student loan purposes, so your employer should not take 9% (6% for a Postgraduate Loan) from them. Your final wages, bonuses and any other pay that is earnings are still counted as normal.
- For redundancies on or after 6 April 2026, statutory redundancy pay uses a weekly pay cap of £751 and has a maximum of £22,530 (GOV.UK, Redundancy pay). Many employers pay more than the statutory minimum under the contract or a redundancy scheme.
- Never use severance pay for voluntary student loan overpayments — set aside 3–6 months of living expenses first, clear any high-interest debt (credit cards, overdrafts), and register for Universal Credit if eligible.
- On a £50,000 balance, 6 months of unemployment adds roughly £1,000 in interest; for graduates heading to write-off, this growth is irrelevant — unemployment actually saves money by pausing repayments that would have been cancelled anyway.
In this article
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 your employment ends, because they are taken from earnings through payroll. A genuine redundancy payment is not counted as earnings for those deductions, but your final wages are. If your balance is likely to be written off (25, 30 or 40 years after the April you were first due to repay, depending on your plan), you should usually prioritise an emergency fund and living costs over voluntary loan payments while you are out of work.
Student loan deductions are taken by your employer through PAYE from earnings, using the same definition of earnings as Class 1 National Insurance. HMRC's manual lists “Redundancy Payments” as income that is not earnings for student loan purposes[source], so a genuine redundancy payment should not have the 9% deduction applied. Wages, overtime, bonuses and Statutory Sick or Maternity Pay are earnings and are still deducted from. Thresholds differ by plan: £25,000 on Plan 5, £26,900 on Plan 1, £29,385 on Plan 2, and £33,795 on Plan 4. Statutory redundancy pay under £30,000 is also not taxable[source]. If your termination package is mixed (for example redundancy pay plus notice pay or holiday pay), ask your payroll team which parts are treated as earnings, because only those count for student loan deductions. You can use the student loan calculator UK to estimate deductions on your ordinary pay. Once unemployed, deductions stop because there is no pay to deduct from, and you do not need to tell Student Finance England as the PAYE system handles it automatically.
Repayment threshold by plan
| Plan | Annual threshold |
|---|---|
| Plan 1 (England/Wales pre-2012, Northern Ireland) | £26,900 |
| Plan 2 (England/Wales 2012 onward) | £29,385 |
| Plan 4 (Scotland) | £33,795 |
| Plan 5 (England Aug 2023 onward) | £25,000 |
| Postgraduate Master's/Doctoral Loan | £21,000 |
Source: GOV.UK, "Repaying your student loan: How much you repay" (checked 2026-09-06). Not sure which plan you're on? Check your student loan plan.
This page is about repaying a student loan after redundancy. If you are looking for how much you can borrow for living costs while studying, read our maintenance loan guide instead, which covers the household income bands and the amounts SFE pays.
Immediate Actions After Redundancy Notice
When you receive redundancy notice, take these steps within the first week to protect your finances:
Week One Priority Actions:
- Request written confirmation of redundancy terms and severance calculation
- Understand your notice period and final working date
- Calculate expected severance amount before and after deductions
- Review employment contract for enhanced redundancy terms
- Check if pension contributions continue during notice period
- Note: Student loan repayments will continue at normal rate during notice period
Financial Preparation Checklist:
Month 1 (Notice Period):
- Build emergency fund from remaining salary (target £2,000-£3,000)
- Cut non-essential spending immediately
- Apply for new jobs while still employed
- Continue mandatory student loan payments (no choice during employment)
Upon Severance Payment:
- Set aside 3-6 months living expenses from severance
- Clear any high-interest debt (credit cards, overdrafts)
- Do NOT overpay student loans—unemployment approaching
- Register for Universal Credit if eligible
What Happens to Student Loans:
Student loan repayments are handled automatically through PAYE:
- During notice period: If you work or are paid your notice as normal wages, deductions continue at 9% of pay above your plan's threshold (6% for a Postgraduate Loan)
- Redundancy payment: not earnings for student loan deductions (HMRC CSLM17055), so no deduction is due on the redundancy payment itself
- Day after employment ends: Repayments automatically stop
- No action required: System updates when P45 processed
- Balance during unemployment: Grows with interest at 4.1% (Plan 1/4/5) up to 6.0% (Plan 2/Postgraduate, capped)
Severance Pay and Student Loan Deductions
For student loan purposes, employers deduct repayments only from what counts as “earnings”, and that follows Class 1 National Insurance: HMRC's manual says that if a payment is liable to Class 1 NICs, it is also liable to student loan repayments. HMRC lists genuine redundancy payments as not earnings for this purpose[source].
How HMRC's manual classes common payments when you leave a job:
| Payment | Earnings for student loan deductions? |
|---|---|
| Redundancy payments | No |
| Damages for breach of contract on dismissal | No |
| Wages, overtime, bonuses and fees | Yes |
| Statutory Sick Pay and Statutory Maternity Pay | Yes |
Note: Source: HMRC Collection of Student Loans Manual, CSLM17055. The manual page does not list every possible termination payment. If your package includes other elements, such as pay in lieu of notice or accrued holiday pay, ask your employer's payroll team how each part is treated, and check your payslips. Income Tax is a separate question: statutory redundancy pay under £30,000 is not taxable, and what is taxable above that depends on what the termination payment includes (GOV.UK, Redundancy: your rights, Tax and National Insurance).
Statutory vs Enhanced Redundancy:
Statutory redundancy (legal minimum, GOV.UK):
- Half a week's pay for each full year you were under 22
- One week's pay for each full year you were 22 or older but under 41
- One and a half weeks' pay for each full year you were 41 or older
- Length of service is capped at 20 years
- For redundancies on or after 6 April 2026, weekly pay is capped at £751 and the maximum statutory redundancy pay is £22,530
Enhanced redundancy:
- Set by your contract or your employer's redundancy scheme, so check your own paperwork
- Ask payroll whether the enhanced amount is paid as a redundancy payment or as something else, because that affects how it is treated for student loan deductions
Automatic Repayment Pause During Unemployment
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.
What Happens During Unemployment:
- Repayments: Zero deductions while unemployed (no income above your plan's threshold)
- Interest: Continues accruing at 4.1% (Plan 1/4/5) up to 6.0% (Plan 2/Postgraduate, capped) on current balance
- Balance growth: If £45,000 balance, grows ~£154 monthly on Plan 5's flat 4.1%, up to ~£225 monthly at the 6.0% Plan 2/Postgraduate cap
- No notifications needed: System updates automatically via PAYE
- Write-off clock: Continues ticking. Your loan is written off 25, 30 or 40 years after the April you were first due to repay, depending on your plan (GOV.UK), whether or not you are working
Balance Growth During Unemployment:
| 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 is cancelled at your plan's write-off date. If you are not going to repay the whole balance anyway, the repayments you miss while out of work would not have changed the amount that is finally written off by much, but check your own figures with the calculator.
Financial Priorities: Severance vs Loan Balance
After redundancy, your severance payment should fund survival and job search, not voluntary student loan payments. Here's the priority order:
Severance Allocation Priority:
Priority 1: Emergency living fund (3-6 months)
- Calculate monthly essential expenses (rent, food, utilities, transport)
- Target: £5,000-£10,000 depending on costs
- This covers you during job search without panic employment
Priority 2: Clear high-interest debt
- Pay off credit cards, overdrafts, payday loans
- Interest rates 15-40% are financial poison during unemployment
- This does NOT include student loans (low priority)
Priority 3: Job search costs
- Professional clothes, haircut, transport to interviews
- Budget £200-£500 for job search essentials
NEVER: Voluntary student loan overpayment
- Unemployed people should not overpay student loans
- Mandatory payments already stopped—no additional payment needed
- Severance is for survival, not optional debt reduction
Decision Framework: Should I Ever Overpay?
Simple answer for most people who are likely to have the balance written off: no.
Never overpay if:
- Likely to have the balance written off rather than repay it in full
- Emergency fund under 6 months expenses
- Any high-interest debt remaining
- Job prospects uncertain or competitive market
Consider overpayment only if:
- On track to repay the loan in full before write-off
- Large severance (£50k+) with 12+ months living expenses secured
- New job already confirmed at similar salary
- Zero other debt and strong emergency fund
- Even then: Overpayment provides minimal benefit versus keeping cash liquid
Job Search Timeline and Income Gap Planning
While you have no pay to deduct from, no student loan repayments are taken, which is one less outgoing during the gap.
Monthly Budget During Unemployment:
Example: £35,000 pre-redundancy salary, received £25,000 redundancy pay
| 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 |
Redundancy pay runway: £25,000 ÷ £1,310 monthly = 19 months financial security (with extreme budgeting)
Universal Credit During Job Search:
May be eligible for Universal Credit if severance depleted or was small:
- Standard allowance: £393.45 monthly (single, over 25)
- Includes job search requirements and work coach meetings
- Redundancy pay counts as capital and may affect eligibility, so check with the Department for Work and Pensions or Citizens Advice
- Student loan note: UC does not trigger student loan repayments (income too low)
- Zero loan deductions while on UC, balance continues growing with interest
Returning to Employment: Repayment Restart
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.
Repayment Restart Process:
- First paycheck: May not include loan deduction (payroll setup delay)
- Second paycheck onward: Deductions resume at 9% of pay above your plan's threshold (6% for a Postgraduate Loan)
- No action required: Your new employer handles everything via PAYE
- New salary adjustment: Deductions based on new salary, not previous role
- Career progression: If new role pays more, loan deductions increase proportionally
- Career demotion: If new role pays less, deductions decrease or may stop entirely
Salary Change Impact on Repayments (Plan 5 threshold of £25,000):
| 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 |
Long-Term Impact of Redundancy Period:
How does 6 months unemployment affect your student loan trajectory?
If heading for write-off:
- On the Plan 5 example above, 6 months unemployment avoids about £450-£900 in loan payments
- If the balance is written off anyway, this money would not have been needed to clear it
- Your balance keeps growing with interest while you are out of work
- Net impact: Positive—you kept cash when you needed it
If on full repayment track (high earners):
- 6 months unemployment delays repayment and lets interest build up
- The extra interest is the cost of keeping a cash buffer during the transition
- This is the cost of having emergency funds during transition
- Net impact: Acceptable trade-off for career stability
Redundancy pauses student loan repayments automatically
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. If your balance is going to be written off, a period out of work is unlikely to change how much you repay overall.
Frequently Asked Questions
Do I have to pay student loans if I'm made redundant?
Not while you have no pay above the threshold. Employers deduct repayments through PAYE from earnings above your plan's threshold, so deductions stop when your pay stops. Genuine redundancy payments are not counted as earnings for these deductions (HMRC manual CSLM17055), while your final wages are. Interest continues to build on your balance while you are out of work.
Is my redundancy payment subject to student loan deductions?
No, genuine redundancy payments are not earnings for student loan deductions. HMRC's Collection of Student Loans Manual (CSLM17055) lists 'Redundancy Payments' and 'Damages for breach of contract on dismissal' as income that is not earnings for student loan purposes. Wages, overtime, bonuses and Statutory Sick or Maternity Pay are earnings and are still deducted from. If your package also includes other payments such as pay in lieu of notice or holiday pay, ask your payroll team how each part is treated.
Should I use my redundancy pay to overpay my student loan?
No, use redundancy pay for emergency funds and living expenses during job search. For most graduates heading toward write-off, overpaying student loans is wasted money since the loan will be cancelled anyway. Keep redundancy pay as a financial buffer - you may need 3-6 months of expenses while job searching. Only consider overpayments if you're a high earner on track to fully repay and have surplus funds after building emergency savings.
What happens to my student loan when I find a new job?
Student loan repayments restart automatically when you return to work and earn above the repayment threshold. Your new employer will deduct repayments through PAYE based on your salary. No action is required from you - the system automatically resumes. If you had a period of unemployment, your loan balance will have grown due to interest accumulation, but repayments resume as normal once you're earning again.
How does redundancy affect my loan if I'm heading toward write-off?
If your balance will be written off (25, 30 or 40 years after the April you were first due to repay, depending on your plan), a period without pay means you make no repayments for that time, and a gap is unlikely to change how much you repay overall. If you are on course to repay in full, a gap delays repayment and lets more interest build up. Use the calculator with your own plan and salary to see which applies.
What if I'm made redundant multiple times?
Multiple redundancy periods compound the impact. Each period of unemployment stops repayments and allows interest to accumulate. For those heading toward write-off, multiple redundancies further reduce total lifetime repayment. For high earners on track to fully repay, multiple redundancies extend the repayment timeline but don't prevent eventual full repayment if you return to high earnings. Focus on building emergency funds to weather career transitions.
Student Loan Calculator UK Editorial Team
Editorial Team
This page is maintained by the Student Loan Calculator UK editorial team, checked against GOV.UK and Student Loans Company guidance. Read more about our editorial approach.
Next step
- repayment thresholds for every plan - A plan-by-plan table of the income above which you start repaying.
- monthly repayment calculator - Enter your salary and plan to get the exact amount taken each month.
- student loan write-off checker - Enter your plan and course end year to get the month your balance is cancelled.
- fixing repayment problems - Covers wrong plans, over-deductions and refunds.