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Why your should consider your position on repaying a student loan.
While postgraduates with student loans face high effective marginal tax rates if they also have a normal student loan, it may not make financial sense to repay part or all their loans.
Regardless of the type of student loan – plan 1, 2, 4 or 5 – repayment for a normal student loan is at the rate of 9% once earnings exceed an income threshold. Depending on the plan, the threshold is between £24,990 and £31,395 annually.
Repayment of a postgraduate loan is at the rate of 6% once income reaches £21,000. Total student loan repayments could therefore be at a rate of 15%.
Marginal tax rates
An employee who is repaying both a normal and a postgraduate student loan is faced with an effective marginal tax rate of 43%:
Unearned income is only taken into account if it exceeds £2,000 for the year and with this comes the requirement to submit a self-assessment tax return.
The £2,000 threshold for unearned income is all or nothing, so keeping unearned income within the threshold, or making sure a tax return is not required, will save on student loan repayments.
Repayment
Despite potentially high marginal tax rates, surprisingly, it will often not make financial sense to repay some or all of a student loan early.
For example, Alan, an employee has a doctoral loan of £28,000:
Guidance on repaying student loans can be found here.
THE AUTHOR
Manager, Personal Tax
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