Tax - Wheres the incentive to earn more

[ProStreet]

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

 

[ProStreet]

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...

 

[ProStreet]

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?

 

[ProStreet]

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.

 

[ProStreet]

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.

 

[ProStreet]

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..

 

[ProStreet]

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

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

 

[ProStreet]

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.

 

[ProStreet]

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.

That is my main point, the interest rate, if it was RPI I'd be quarter/ half way in paying it off by now.

 

[ProStreet]

I would say you fall out of the typical envelope of graduates. Put yourself in some of their shoes earning less than half of your salary and seeing their student loan balance increase each year because their contributions aren't even clearing the interest.

It's compounded anyway, so it might not look like you're clearing much at the start, but look at it after 10 years and you'll probably be clearing at least half of it.

BTW i don't disagree that the interest rates suck - i for one am glad my loan was on plan 1.

My contributions are not clearing the interest? And those on lower salaries pay less interest. The interest rate is stepped based on salary, which is another joke.

 

[ProStreet]

If you are not happy now, just wait until you earn over 100k and they start clawing back your personal allowance.....

Yes this happened to my brother he started earning less when he got a payrise. Moved to HK and now earning £££££.

 

[ProStreet]

Btw the maths on this doesn't make a lot of sense. £5k interest on a £40k loan is about twice what I'd expect.



This is unlikely unless your brother was in a very unique set of circumstances (e.g. pension contributions exceeded annual/lifetime allowance).

I'll check my balance but was increasing compared to contributions.

Was the case.

 

[ProStreet]

Indeed. Fortunately you can reduce your tax liability by dumping more into a pension via salary sacrifice.

You're only deferring your tax liability to when you retire.

 

[ProStreet]

There is never a reason financially to not want to earn more. You can't be worse off from suddenly getting a pay rise. You only pay tax on the amount over each threshold and you can always offset things as discussed already.

With reference to the child benefit thing that's a whole different argument and an unfair and stupid system. I say this on the basis that 2 x household earners can make £49,999 each totalling just under 100k household income and get the full allowance, and yet someone earns 60k as a single earner, they get zero child benefit allowance for their household.



You are on the housing ladder, have a salary of 70k and a BTL house and come on here complaining of the amount of tax you owe? Do you understand how that makes some people feel that read comments like that who are in a rent trap with low salaries struggling to keep their jobs?

Well renting is not all that bad.

Tenants get security, flexibility and don't have to worry about anything. Ive been a landlord for 12 months and trust me, it's a nightmare and not worth it. You don't make any money. You take the risk of tenants not paying. Flats have gone down in value (ive lost about £50k of value on the flat, and that was before my tenants flooded it, and guess who has to pay....).

I'm very good to my tenants by the way, probably too good. I respond to them immediately, always on hand to come over and fix something if needed.. (the oven broke on a Sunday, I ordered the part and came on bank holiday Monday to sort it etc etc). But it's just completely messed up how the government treat landlords, especially during the pandemic. Most landlords c70% only have one additional property btw, it's not like we're millionaires.

 

[ProStreet]

Now I have no desire to be a landlord because of the other points that you raise but - surely the main point isn't to make money? It's to gain an extremely valuable asset while largely paying for it with someone else's money?

If you're expecting to get the house paid off and have an ongoing income from it then you might be expecting* too much.

* By which I don't mean that is impossible. But just it's better considered a bonus than an expectation.

it's a similar story with your wage complaint. You're complaining that you don't get to take home as much of your extra earnings as you would like - by comparing to people who do get to take a higher percentage specifically because they earn a massive amount less than you.

Basically everything you're complaining about is a direct symptom of you being extremely well off. I don't think you realise how lucky you are.

Yes I realise I may be coming across in a bad light..

The only reason why I am a landlord is because I couldn't sell my flat during the pandemic, and was going mad stuck in a flat, so my partner and I bought a house together. Yes I know most people can't afford to buy at all.

I know I earn more than most. I did work hard to get where I am and even missed 5 years of secondary school in the process (through no fault of my own).

Maybe i should feel better about my position but I don't seem to think like that.. I always want more for myself.

 

[ProStreet]

Oh no i earn 70k and only got a take home bonus of 3400. Woe is me.

Lol ok.

 

[ProStreet]

But you'll be avoiding the 9% student loan repayment. Assuming you don't pay off the loan and it simply expires after 30 years, dumping money in to your pension would be one way to reduce the amount you repay.

Good point - cheers

 

[ProStreet]

Broadly they pay for all of their public services by having a higher tax rate - for which they generally receive much better services, possibly indicating why they're mostly at or near the top of the world happiness index year after year. How much of that higher rate in % terms goes specifically to fund universities who knows, probably not that much.

Perhaps instead you could explain why a system where people are leaving university with £40-50k of debt at an interest rate of >5% is appropriate for a rich first world country when so many of our peers on the world stage can do it for much cheaper and in some cases free? Or why tuition needed to be tripled in the first place back in ~2012? (hint: it was because the gov at the time pursued a misguided austerity program which caused untold misery, lost economic growth, wage stagflation, ended the LDs as a political force (lol) etc)



You wouldn't have to 'gamble' anything. Simply balancing tax take vs expenditure is a bit pointless and simplistic. A country is not a household and running at a deficit isn't necessarily a problem if your economy is growing. Unsure why you'd include international students in the figures, clearly they would be charged differently - although some of those countries even offer free tuition to other EU citizens .

Please note that I specifically said I wasn't arguing for zero tuition fees, rather that the current system is unfair. The previous iteration of student loans were 'ok' if only because virtually all of what was paid back was capital from the loan rather than interest. Meaning people on relatively average salaries had a hope of clearing them well before the 30 year write off. Apparently 3/4 of people will not pay the current style loans off despite paying them for 30 years. If that's not an indication the system is broken then I don't know what is.

Totally agree.

The difference in the amount you pay for tuition between plan 1 and plan 2 is ridiculous. Not sure why I'm getting so much hate, my main argument is just the interest rate of the student loan, which is causing me to pay additional tax for probably 10-20 years longer than if the rate was reasonable.

 

[ProStreet]

I do sympathise with the OP. A guy I sit next to at work is the exact same age as me. I went to university in 2011, he took a gap year and went in 2012. I'm on plan 1, he's on plan 2. We earn similar money (good for our age), I will have my loan paid off in <4 years probably, his loan capital is getting bigger. I joke and ask him if that gap year was worth it .


Just logged on to my SLC account to check


It's completely unfair that I start Uni on the last year of the old plan. And people who happen to be born 1 year after me who earned the same as me would not be any closer to paying off their loan and yet I am.

Cheers. Yep yours is 1.1 and 3k per year and mine is currently 5.6% and 9k per year. Massive difference. Funny thing is the only reason why I'm on plan 2 is because I missed 5 years of school (managed to catch up 4 of the years) due to being sexually assaulted. Otherwise I'd be on plan 1. Yeah that's life. Maybe TMI buts it's true!

 

[ProStreet]

So pay off the loan. You can afford it, so do it. With your income you could easily afford to repay an extra £10k per year, maybe £20k.

https://www.gov.uk/repaying-your-student-loan/make-extra-repayments

Yeah cheers, I'm now considering it carefully. I want to get rid of one of my mortgages first then will probably start doubling my contributions.