Going to university used to mean graduates had the whole world ahead of them. Having a degree almost certainly meant a high paying job. But these days, most student leave university with a bleak outlook; low pay and high debt. Repayment of student loans can further erode into the meagre earnings of recent graduates. Repayment of student loans are dependednt on when you took out the loan and are as follows:
- for those taking out student loans before September 2012 – you pay 9% of income earned above £17,335 before tax per year (From April 2016 the repayment threshold will rise to £17,495).
- for those taking a loan out after 1 September 2012 – You pay 9% of anything you earn over the threshold of £21,000 per year.
If 9% of your pre-tax income sounds high then you don’t want to read this. When you take into account Income Tax and National Insurance contributions, a graduate will end up taking home just 59p out of every £1 they earn above the repayment thresholds. If a graduate earns above the basic rate tax threshold, actual take home pay would reduce to 49p out of every £1 they earn. Even more frightening is that a graduate will receive 32p for every £1 of income earned between £50,000 and £60,000 if the graduate has two children and is in receipt of Child Benefit payments, according Tilney Best Invest.
As you can see from the above, your take home pay can be eaten into with all the taxes and repayments. But with careful financial planning, people have found legal ways to stop paying their student loans and increase their take home pay.
One of the most common ways is through salary sacrifice. With salary sacrifice, an employee can reduce their income to below the required thresholds and therefore make further savings.
Lets look at an example to see how salary sacrifice would work in practice:
Say John, a graduate, earns £30,000 and has the option to either put money into his pension either via salary sacrifice or out of his net salary (in which case the tax is claimed back). If John puts money into his pension via salary sacrifice, his official gross salary is not £30,000 but £27,000. This will cut his income tax bill and his national Insurance bill and crucially it will also cuts his loan repayments from £810 to £540. The result is a take home pay of £20,907 instead of £20,277.
Below is a table that illustrates the above…
|Without Sacrifice||With Sacrifice|
|Less Pension contribution||£0||£30,000|
|Less Personal Allowance||-£10,600||-£10,600|
|Less income tax at 20%||-£3,880||-£3,280|
|Less National Insurance||-£2,632.80||-£2,272.80|
|Less Student Loan Repayments||-£810||-£540|
|Less net pension contributions||-£2,400||£0|
|Gross Pension Contributions||£3,000||£3,000|
As seen the graduate will receive the same pay and gross payment into their pension in both instances, but by electing to use salary sacrifice, they have over £600 more net pay each year. What’s more, if student loans remain outstanding for certain periods, they can potentially be written off…
That might be good news for individual graduates, but it isn’t exactly good news for taxpayers as a whole. This is one of the reasons that salary sacrifice might be in line for the chop in the coming budgets so take advantage of it will you still can.