‘Student Tax’ to hit graduates on minimum wage by April
Thousands of graduates will find themselves stranded in their home town, unable to root out professional opportunities, when April’s hike in the minimum wage drags them into the threshold of student loan repayments, a top financial services firm has warned.
The government announced an above inflation rise in the National Living Wage of 5.6 per cent as part of October’s Budget, prompting warnings of price rises and hiring freezes from business lobby groups.
But according to Blick Rothenberg recent graduates will bear much of the brunt, with those earning as little as £12.21 per hour in a full-time job sucked into to student loan repayments.
A full-time employee on the National Living Wage is set to earn roughly £26,660 when April’s uplift is introduced, meaning they will surpass the £25,000 threshold at which student loan repayments kick in.
The loan repayments will leave graduates on the minimum wage paying a marginal tax rate of 37 per cent on their earnings above the threshold, leading Blick Rothenberg to warn graduates will struggle to progress in their careers.
“The combination of a high effective tax burden and overall cost pressures means that many university leavers will also struggle to move out of their home areas to find the best opportunities,” said Robert Salter, a director at the firm, also branding the repayments a ‘Student Tax’.
“If they have no monetary support from family or savings as a safety net, they may be in an extremely difficult position if a financial emergency arises.”
The intervention comes after education secretary Bridget Philipson announced in November that universities would be permitted to hike their tuition fees from £9,250 to £9,525.
The move – a longstanding demand of the higher education industry body Universities UK – was an attempt to shore up universities’ fragile finances, after inflation meant they had suffered a real terms reduction in income.
But the fee hike was not reflected with a parallel hike in the student loan threshold, leading Salter to warn university might no longer be a worthwhile aspiration for some students.
“Official statistics suggest that over one third of UK graduates struggle to find a ‘graduate level’ job on leaving university,” he said, adding: “While studying can be a great experience for many students, it does not guarantee work or future levels of income and clearly comes with a significant tax hit for ex-students which will stay with them for many years.”