Postgraduates with student loans will be liable for high effective marginal tax rates – which apply to every £1 above repayment thresholds – but partially or fully repaying all of their student loans might not make the most financial sense.
Regardless of the student loan plan type, the normal repayment rate is 9% above the specified threshold, which varies from £24,990 to £31,395 a year depending on whether it is Plan 1, 2, 4, or 5.
Postgraduate loans have a repayment rate of 6% on income over £21,000, so repayments for both undergrad and postgrad loans would have a total rate of 15%.
So, how might this affect higher earners, and is it worth paying off your student loans early if you have a Master’s loan too? We explain further below.
Marginal tax rates with student loans
The average employee with earnings exceeding the repayment thresholds for both an undergraduate and postgraduate loan will face an effective marginal tax rate of 43%.
This includes the 15% rate for both student loans, the 20% basic Income Tax rate, and the 8% rate for National Insurance Contributions (NICs) in this earnings bracket.
For those earning between £50,270 to £100,000 a year, this effective marginal tax rate will increase to 57%, including the 40% higher Income Tax rate and 2% for NICs.
Meanwhile, those earning from £100,000 up to £125,140 could face a hefty 77% rate. While NICs remain at 2%, for every £2 earned over £100k you lose £1 of your tax-free allowance, pushing you towards the dreaded 60% tax rate.
Unearned income is only liable for student loan repayments if it exceeds £2,000 a year and requires submitting a Self-Assessment Tax Return.
If you also earn income from a rental property, savings, or self-employment, you should therefore aim to keep this below the threshold to reduce your student loan repayments.
Making early student loan repayments
Despite ongoing high marginal tax rates, perhaps surprisingly, it may not be the best financial move to repay all or some of a student loan off early.
As an example, if an employee has a £28,000 doctoral loan and earns £35,000 a year, they will repay £840 a year based on 2024-2025 terms. These annual payments would total £25,200 by the time the loan balance is due to be written off in 30 years.
If this employee repaid £5,000 of the loan in the first year, it’s likely they would still end up repaying the same amount of £25,200 over the same length of time due to interest – which is set at the Retail Price Index (RPI) plus 3% for postgraduate loans.
In cases like this, there is no real advantage to making early repayments – but the pros and cons of doing so depend on the individual’s financial circumstances.
You can find guidance on student loan repayments on the government website for more information on specific repayment plans and thresholds.
If you would like professional advice on the most efficient way to manage your tax and student loan repayment liabilities, why not speak to our accountants in Barnsley?
Give us a call on 01226 298 298 or send an email to info@gbac.co.uk to find out how our financial advisers can help you manage your accounts effectively.