Tax - Wheres the incentive to earn more

ProStreet · 15 Jul 2021 at 13:11

I'm a graduate on the plan 2 student loan, im about 5 years into employment and earning a 'high' salary relative to most (c£70k). However any additional income I now earn is taxed at >50% despite only being in the 40% tax bracket. This is due to the student loan which is effectively an additional tax.

Even though I pay around £4k pa. on my student loan, due to the interest rate of RPI plus 3%, I'm not paying anything against the capital, only interest.

For example, I got my bonus of £6900 this month and my take home from that bonus was £3400.

Where is the incentive to earn more? Why is the government charging ludicrous rates of interest. Only the extremely high earners can afford to pay it off early, whereas the lower income don't pay anything at all, and like most of the time, the middle income earners pay the most of it.

I understand if people feel like I'm being selfish when im on a decent income, it just feels so demotivating to try to work harder when you get less than half of it in return.

Anyhow

dlockers · 15 Jul 2021 at 13:12

Welcome to the real world.

[/thread].

It if it high interest, pay it off sooner.

ProStreet · 15 Jul 2021 at 13:14

dLockers said:
Welcome to the real world.

[/thread].

It if it high interest, pay it off sooner.

Its not classed as a debt. If you pay it off then break your back, and can't work, you can't get the money back and there was no point paying it off in the first place...

dlockers · 15 Jul 2021 at 13:16

smeemi said:
Its not classed as a debt. If you pay it off then break your back, and can't work, you can't get the money back and there was no point paying it off in the first place...

It isn't a tax. It is a bill you owe. Pay it off sooner and stop accruing interest.

ProStreet · 15 Jul 2021 at 13:18

dLockers said:
It isn't a tax. It is a bill you owe. Pay it off sooner and stop accruing interest.

No for plan 2 it's effectively a tax. You pay based on your earnings. 99% of people won't pay it off due to this. Only extremely high earners that can pay more monthly than the interest will pay it off. I won't be paying it off until I earn about £90k a year, assuming RPI doesn't go to extreme rates.

Why it isn't a debt

- it expires after 30 years of graduation - you don't pay it if you earn less than £25k a year. Why take the risk of paying it off?

dlockers · 15 Jul 2021 at 13:20

smeemi said:
No for plan 2 it's effectively a tax. You pay based on your earnings. 99% of people won't pay it off due to this. Only extremely high earners that can pay more monthly than the interest will pay it off. I won't be paying it off until I earn about £90k a year, assuming RPI doesn't go to extreme rates.

Your minimum repayment is based on earnings. Logon to the SLC website and pay it back manually early and you'll save thousands.

ProStreet · 15 Jul 2021 at 13:21

dLockers said:
Your minimum repayment is based on earnings. Logon to the SLC website and pay it back manually early and you'll save thousands.

Assuming I'm in employment for 30 years. If I pay it off today and get hit by a bus tomorrow, that'll be a total waste of cash.

dlockers · 15 Jul 2021 at 13:23

smeemi said:
Assuming I'm in employment for 30 years. If I pay it off today and get hit by a bus tomorrow, that'll be a total waste of cash.

Well then shout at the clouds until you feel better.

Based on your opening post it sounded like you were on a good earnings trajectory. Do you have real concern you won't be earning well?

ProStreet · 15 Jul 2021 at 13:25

dLockers said:
Well then shout at the clouds until you feel better.

Based on your opening post it sounded like you were on a good earnings trajectory. Do you have real concern you won't be earning well?

My only point was where is the incentive to earn more and feel that the government shouldn't be charging these kinds of interest rates (esp when rates are nil), I would be half way there by now in paying it off.

Semple · 15 Jul 2021 at 13:26

Agreeing with Dlockers here. For someone with your salary (+ potential future earnings) will very much likely pay it off. Much more likely in fact than breaking your back (as the example you chose). So you can choose to overpay and avoid huge amounts of compound interest.

If you were on a typical graduate salary of say 25-30k, or without much scope for increasing your earnings, then it's quite likely you wouldn't pay off the loan until it gets scrapped, so voluntary payments wouldn't be worthwhile.

Be grateful it's not a graduate tax, would you be happy if it wasn't a "loan to be repaid", but they taxed all graduates X% of their earnings for 30 years? - There would be no escaping payments then even if you had the means to pay-off your entire loan in one go.

Semple · 15 Jul 2021 at 13:31

smeemi said:
My only point was where is the incentive to earn more and feel that the government shouldn't be charging these kinds of interest rates (esp when rates are nil), I would be half way there by now in paying it off.

If you really feel that hard done by, i'd suggest handing in your notice, and looking for a job in a supermarket - where the wages will likely not exceed the threshold before SL contributions start. In fact, you'd save a massive whack on tax and NI too.

I've already placed my bet on which option you'll choose.

dlockers · 15 Jul 2021 at 13:32

smeemi said:
My only point was where is the incentive to earn more and feel that the government shouldn't be charging these kinds of interest rates (esp when rates are nil), I would be half way there by now in paying it off.

The more you earn, the quicker you pay it off?

I personally cleared the balance of mine with a Curve card linked to a points credit card, then cleared it interest free over 12 months.

ProStreet · 15 Jul 2021 at 13:34

dLockers said:
The more you earn, the quicker you pay it off?

I personally cleared the balance of mine with a Curve card linked to a points credit card, then cleared it interest free over 12 months.

Mine is over £40k and going up by £5k per year, less £4k of contributions. Pretty tough..

Yes I agree can always pay it off, but there are better options like getting on the housing ladder which I have done. I could go into another rant on my buy to let property. Make zilch on that.

My rant for the day..

Semple · 15 Jul 2021 at 13:35

smeemi said:
I could go into another rant on my buy to let property. Make zilch on that.

My rant for the day..

Oh jesus. Do you not realise how entitled you sound?

ProStreet · 15 Jul 2021 at 13:38

Semple said:
Oh jesus. Do you not realise how entitled you sound?

Probably a little bit yes. I do work hard for it though.

Hotwired · 15 Jul 2021 at 13:42

smeemi said:
My only point was where is the incentive to earn more and feel that the government shouldn't be charging these kinds of interest rates (esp when rates are nil), I would be half way there by now in paying it off.

You got a loan for your education and now you're educated and doing well you're complaining about paying back and want the amount reduced.

Huh.

ProStreet · 15 Jul 2021 at 13:46

Lol I probably haven't come across well on this thread. I don't mean to come across as entitled but life is pretty tough for graduates compared to the older generation. No DB schemes, no free education, could go on.

cheesyboy · 15 Jul 2021 at 13:49

People on £30k with a student loan have a marginal tax rate of 41%. So not much different to OP.

I don't have a student loan any more, but do have a marginal tax rate of about 60% (!!) thanks to child benefit clawback.

Pudney · 15 Jul 2021 at 13:49

smeemi said:
Lol I probably haven't come across well on this thread. I don't mean to come across as entitled but life is pretty tough for graduates compared to the older generation. No DB schemes, no free education, could go on.

If it makes you feel better, I largely disagree with what you've said, however, the rate of interest charged I agree is a bit stupid. You're effectively being charged a commercial rate of interest on the loan with the "benefit" of no fixed repayment schedule. Being charged RPI is fair, being charged slightly more is ok, being charged the same amount a high street lender would charge is a bit off imo.

dowie · 15 Jul 2021 at 13:51

smeemi said:
I'm a graduate on the plan 2 student loan, im about 5 years into employment and earning a 'high' salary relative to most (c£70k). However any additional income I now earn is taxed at >50% despite only being in the 40% tax bracket. This is due to the student loan which is effectively an additional tax.

It isn't anything of the sort, it's literally paying back money you were loaned (and presumably spent on yourself and/or tuition) while studying + interest and will stop being deducted once you've paid it off (barring some possibly overpayments in the year you pay it off because their system is naff).

For example, I got my bonus of £6900 this month and my take home from that bonus was £3400.

Where is the incentive to earn more?

Well, the £3400 is an incentive for a start? Or would you prefer not to have that - you could always use that to pay off more of your student loan if you feel the interest charges on your loan are greater than the returns you'll get on any of your investments.

And of course, on 70k, you should be perfectly capable of paying off your loan.