Many students have jobs in the hospitality sector or other sectors that receive tips. Once they graduate and need to start repaying their student loans, it raises the question of whether student loan deductions apply to these additional earnings.
The relationship between student loans and tips is more complex than it first appears, involving intricate rules around National Insurance contributions, tronc schemes, and payroll systems.
Understanding student loan deductions
First, let’s clarify what student loan deductions actually are. Student loan repayments are automatically taken from salary through the PAYE system, appearing alongside income tax and National Insurance contributions on employees’ payslips.
Despite what the name might suggest, student loan repayments in the UK aren’t actually tax deductions in the traditional sense. They don’t reduce an employee’s taxable income.
Instead, they are statutory deductions from an employee’s income that happen to be collected through the tax system. HMRC collects the money on behalf of the Student Loans Company, which maintains records of your outstanding balance and repayment history.
Current repayment thresholds for 2025-26
The amount an employee will repay depends on the loan plan and income level:
- Plan 1: £26,065 annually (£2,172 monthly)
- Plan 2: £28,470 annually (£2,372 monthly)
- Plan 4: (Scottish): £32,745 annually (£2,728 monthly)
- Postgraduate: £21,000 annually (£1,750 monthly)
For most undergraduate loans (Plans 1, 2, 4, 5), employees will repay 9% of their income above the threshold. For Postgraduate Loans, it’s 6%.
The critical connection between National Insurance and student loans
Here’s where it gets interesting for tip earners.
Earnings for student loan purposes are calculated in the same way as they are for National Insurance contributions (NIC). This is crucial because tips and gratuities have special treatment under National Insurance rules.
There are different rules for calculating NIC than for Income Tax.
How tips are treated for National Insurance (and therefore student loans)
The treatment of tips for National Insurance purposes depends on several factors, including the type of tip:
Direct tips from customers
If an employee directly receives a tip or finds one on a table and the employee keeps this with no employer or Troncmaster involvement, PAYE (Pay As You Earn) does not apply.
However, such earnings must still be reported through the employee’s self-assessment tax return, but no National Insurance (NI) or student loan repayments would fall due to the amount.
Direct tips from a customer are not subject to student loan deductions.
Employer-distributed tips
If the employer is engaged in any aspect of the tip distribution process, the employer decides on the distribution, the tips are treated the same way as all other income from the employment, tax, NIC and crucially, student loans are deducted.
Tips allocated from the employer, without the use of a tronc scheme, are subject to student loans deductions.
Tronc Schemes
A tronc is a special pay arrangement used to distribute tips, gratuities and service charges. A Troncmaster is appointed (a third party not directly connected to the employer), responsible for arrangements to share tips among employees.
Legislation states that any amount paid to an employee which is a payment ‘of a gratuity’ or is ‘in respect of a gratuity’, is exempt from National Insurance contributions if it meets either of the following two conditions:
it is not paid, directly or indirectly, to the employee by the employer
It does not comprise or represent monies previously paid to the employer, for example, by customers; it is not allocated, directly or indirectly, to the employee by the employer. The allocation is done by the Troncmaster.
Tips paid through tronc schemes are not subject to student loan deductions.
Mandatory Service Charges
Where a charge is not a purely discretionary amount and there is an obligation to pay, the payment is a mandatory service charge. If you impose a mandatory service charge and the money is paid out to your employees, National Insurance contributions are always due on the payments. This is regardless of how the money
is shared out between employees.
Mandatory service charges would therefore be subject to student loan deductions.
The impact of the Allocation of Tips legislation
From 1 October 2024, the Allocation of Tips legislation ensures the distribution of tips and gratuities is fair and transparent. This means that employers, including agencies, are required to pass 100% tips, gratuities and service charges onto their employees.
But, this legislation does not change how these payments should be assessed for tax and National Insurance contributions (and therefore student loan repayments).
Practical advice for employers and employees
For employers:
- Understand your obligations: If you’re involved in tip distribution, you may need to apply student loan deductions.
- Consider tronc schemes: A properly structured tronc scheme with an independent Troncmaster can help avoid National Insurance and student loan deductions. A correctly set up tronc scheme will save 8% Employees’ NIC and 15% Employers’ NIC, plus save your employees with student loans additional deductions.
- Seek professional advice: The rules are complex, and non-compliance can result in penalties.
For employees:
- Check your payslips: Verify whether student loan deductions are being applied to tip income.
- Understand your workplace system: Find out if your employer uses a tronc scheme or processes tips through payroll.
- Keep records: If you receive tips directly, maintain records for your self-assessment tax return.
Whether student loan deductions apply to your tips depends largely on how those tips are processed and distributed. Tips received directly from customers with no employer involvement are generally not subject to student loan deductions through PAYE, though they must still be declared for income tax purposes.
However, if your employer is involved in the tip distribution process in any way, student loan deductions will likely apply. The key factor is whether the tips are treated as earnings subject to National Insurance contributions, as student loan deductions follow the same rules.
For workers in the hospitality industry and other tip-earning sectors, understanding these rules can make a significant difference to take-home pay.