‘Graduate tax’ coming home to roost

John Cater considers the long-term impact of the loans the Class of 2012 is now starting to repay

April 29, 2016
Student loan debt concept. Woman with heavy box
Source: iStock
From this month graduates face up to a burden of debt likely to have a major impact on their own and the nation's finances

It’s the end of April and the first payslip of the tax year floats on to the doormat. Or, more accurately, it’s somewhere hidden in that murderously expensive new software package the HR consultant persuaded you to buy, as a ping from the cloud resounds in your encrypted, password-protected and totally inaccessible personalised inbox.

While paying is a privilege, the numbers aren’t pretty. The chancellor’s inability fully to tax the profits of global corporations has shifted, by increasingly multifarious and surreptitious means, the tax burden to the individual and the employer, and pension and national insurance changes have taken their toll – but this is a particularly important payslip for one group.

This month represents the first occasion when those who entered university in 2012 and graduated last summer begin to repay their loans, to all intents and purposes an additional tax of 9 pence in the pound on earnings over £21,000. The merits of the scheme have been ventilated loud and oft over the past half-decade, but the likely longer-term socioeconomic consequences, positive and negative, have attracted far less attention.

I recall a tale, doubtless apocryphal, of a dozen students in a house-share in Rusholme who decided that, on graduation, they’d have the take-home pay of a vice-chancellor. Each planned to work sufficient hours to earn up to the repayment threshold, but none beyond it. Doubtless they’re all in the City now. But there is a serious point behind this. An individual earning £42,000 per annum will have a tax, national insurance and student loan repayment bill £5,000 greater than a couple, if both are working part-time and each paid half that salary.

Job-sharing and role-sharing have plenty of upsides: a better work-life balance, more involvement of both parents in child-rearing, greater community engagement. But if, as one might anticipate, it becomes more commonplace, the reverberations will be felt in the Treasury – and those re-jigged calculations of the resource accounting and budgeting (RAB) charge will need revising upwards again.

And such implications would be felt elsewhere. While a student loan is not conventional debt, ability to pay will be an important factor for both borrowers and, one hopes, lenders. Access to mortgage finance for a couple is most commonly determined at three or four times the higher salary plus the lesser. In the example above, a single salary on a four-fold multiple would attract a mortgage of about £170,000, a garden shed in London, but the role-sharers’ less than two-thirds of that.

Fast-forward: it’s the end of the 2020s and we’re looking back at the implications of the “graduate tax” introduced a decade and a half ago. Fewer of the Class of 2012 are buying their own homes, accelerating a trend evident since the turn of the century, but the gender mix at the school gate and in the community centre is more balanced. Meanwhile, inside No. 11, with tax-take falling and the costs of caring for the wealthy elderly rising rapidly, the chancellor is wondering how she will balance the current account…

John Cater is vice-chancellor of Edge Hill University.

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