A taxing life ahead for A Level students

In his speech at Policy Exchange on 13 May 2024, the prime minister restated his aim to 'end rip-off degrees and massively expand the number of apprenticeships, because a degree is not the only path to success in the modern economy'.

With many students sitting their A level exams in this and the coming weeks, the decision of whether to go to university or seek out an apprenticeship may have already been made. The choice however is no longer just an academical one and for some, may represent a long-term financial decision that they could feel the consequences of until retirement. 

The new cohort of English university students starting an undergraduate course this year will be subject to the new Plan 5 student loan that was introduced in 2023, highlighted in this previous Weekly Tax Brief article. The main changes in this new student loan regime are that the interest rate applicable is likely to be lower, but the income threshold at which payments are made is also lower at £25,000 and the payment period can be as long as 40 years.

On the face of it, A level students might be put off from pursuing an apprenticeship scheme as the most recent statistics suggest the median nominal salary for working age graduates was £38,500, compared to £27,000 for working age non-graduates.

Whilst graduates in the Plan 5 student loan scheme need to pay 9% of their income over £25,000 in repayments, this still leaves the average graduate earner much better off. For clarity, the following calculations all assume the graduates are within the Plan 5 student loan repayment scheme.

On a £38,500 salary, a graduate can expect their take home pay to be £30,025, meaning they pay an effective tax rate of 22.01%. Even though the effective tax rate for an average non-graduate earner is only 15% by comparison, the lower salary overall means the take-home pay is still substantially less at £22,960.

This of course ignores the fact that the future earning potential of some apprenticeship schemes may be the same or ever better than some undergraduate courses and there are many attractive opportunities for those seeking an alternative to life as an undergraduate, as highlighted in the Top 100 apprenticeship employers in which RSM UK features. 

Where salaries between graduates and non-graduates level out over time, the effective annual tax cost of the student loan is much more pronounced. If it is assumed that the interest rate on the student loan is 3.5%, then we calculate that someone with an average student loan of £42,100 would need to earn around £47,000 each year over the 40 year term to pay it off in that period. On the same basis, someone on a £50,000 salary would take 31 years to pay off their loan.

At this £47,000 salary level, the take home pay for a non-graduate would be £37,360 whereas a graduate would be nearly £2,000 worse off each year with £35,380. 

Ultimately, the decision as to whether to go to university is not purely a financial one and many may feel they are not ready to jump into the workplace straight after school. That said, it can be one of the biggest financial decisions someone might take in their lifetime so it’s vital students are provided with the support and guidance to make an informed one.