Why a graduate on £30,000 pays more tax than a pensioner on the same income
Key Points
- Graduates on £30,000 face a 37% marginal tax rate; pensioners on the same income face 20%.
- Postgraduates with a Plan 3 loan face 43%, rising to 57% above the higher rate threshold.
- Half of full-time Plan 2 graduates are projected to face at least 51% by 2035/36.
- Effective tax rates over 25 years have risen from 18% under Plan 1 to 23% under Plan 5.
- The average graduate's 25-year tax burden rises from £167,000 to £240,000.
A graduate earning £30,000 faces a marginal tax rate of 37%, against 20% for someone above State Pension age on the same income.
The gap comes from two deductions the pensioner does not pay. Graduates hand over 8% in National Insurance and 9% in student loan repayments on earnings above the threshold, on top of the 20% basic rate of Income Tax.
Postgraduates carrying a Plan 3 loan pay a further 6% on earnings above £21,000, taking their marginal rate to 43%.
Above the higher rate threshold of £50,270, the graduate rate reaches 51%: 40% Income Tax, 2% National Insurance and 9% in loan repayments. Postgraduates in that band face 57%.
The Intergenerational Foundation estimates that by 2035/36, half of all Plan 2 graduates working full-time will face a marginal rate of at least 51%, as frozen thresholds pull more of them into the higher rate band.
The median Plan 2 graduate salary is projected to reach £56,080 by then, against a projected higher rate threshold of £55,520.
Income tax thresholds will have been frozen for a decade by 2030. Repayment thresholds have been frozen repeatedly over the same period, and the uprating mechanism for Plan 2 was switched from average earnings to RPI inflation in 2022.
A lifetime of taxes and repaying
Effective tax rates tell the same story over a working life.
Plan 1 graduates paid 18% of their total earnings in tax and loan repayments across the first 25 years after graduation. Across the 11 Plan 2 cohorts that figure rose from 19% to 22%, and Plan 5 graduates are expected to reach 23%.
The Intergenerational Foundation describes the shift from 18% to 23% as equivalent to raising the basic rate of Income Tax from 20% to around 30%. Employee National Insurance fell from 12% to 8% over the same period.
In cash terms, the total tax burden for the average graduate in the first 25 years after graduation is set to rise from £167,000 to £240,000, a 43% increase across 20 cohorts.
Lower earners on Plan 5 will pay £65,800 more than their Plan 1 counterparts, a rise of 74%. Neither figure accounts for the extra 15 years of repayments Plan 5 graduates face relative to Plan 1.
Student loan repayments are also calculated before pension contributions, unlike Income Tax and National Insurance.
The Intergenerational Foundation recommends changing that, estimating it would cut lifetime repayments by £4,400 for a typical Plan 2 graduate contributing 5% of earnings to a pension.
