In the 2020-21 financial year, the outstanding student loan balance in the UK stood at a whopping £178 billion, and an average loan balance of £28,000 going into repayment.
As you may already know, student loan payments are taken out of a graduate’s salary by their employer when their income exceeds the payback threshold set out by the government. If self-employed, loan holders must pay their dues at the end of the tax year.
But repayment may be looking differently in the 2022 tax year. As first reported by The Financial Times, HM Treasury and the Department for Education are said to be making plans to drop the payback threshold by more than £4,000. This could not only mean that you might start paying back your loans sooner than you anticipated, but if you’re already earning above the threshold, you could be due to pay more each year.
Here’s everything you need to know about the potential changes and how they may affect your finances in the upcoming tax year.
Repayment plan thresholds
There are currently 4 different types of student loan repayment plans in the UK, with the majority of graduates falling into Plan 2 (those who are English or Welsh and started an undergraduate course in the UK after 1 September 2012). The payback income threshold for this category remains at £27,295 per year before tax and other deductions.
Once your income exceeds this threshold (meaning you are earning more than £524 a week or £2,274 a month), 9% of the amount you earn over the threshold is deducted from your pay cheques. However, with a proposal of a lowered income threshold understood to be as low as £23,000, graduates with current incomes falling between £23,000 and £27,295 will be having unexpected loan payment deductions from their pay cheques in 2022.
This proposal is said to be in line with the government’s efforts to save up to £2 billion per annum. As it does each year, the repayment income threshold is scheduled to change on 6 April, though the changes have never been so drastic to date.
How much you could be paying with the proposed changes
Today, a recent graduate from higher education earning £27,295 per year would not have any deductions from their pay cheque. So, let’s take a look at what a £23,000 payback threshold would mean for this person, as well as for a loan holder earning just over £23,000 and £35,000 per year.
|
Annual income |
Approximate annual payment with the current £27,295 threshold |
Approximate annual payment with the proposed £23,000 threshold |
|
£23,500 |
£0 |
£90 |
|
£27,295 |
£0 |
£477 |
|
£35,000 |
£690 |
£1170 |
The proposed changes may affect graduates’ annual net pay by hundreds of pounds. As more announcements are expected to be made in the upcoming months, it may be a good idea to be one step ahead and start thinking about what these changes could mean for your finances in the new year.
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