Tax rate on graduates' additional pay heads towards 50%

·3-min read
Photo by: zz/KGC-254/STAR MAX/IPx 2021 3/3/21 Chancellor of the Exchequer Rishi Sunak displays the red budget briefcase to waiting media on Downing Street on March 3, 2021. When he delivers his budget to Parliament, The Chancellor is expected to announce billions of pounds in tax cuts and spending increases and maintain numerous other support packages to assist workers, businesses and all citizens as the worldwide coronavirus pandemic continues. (London, England, UK)
Photo by: zz/KGC-254/STAR MAX/IPx 2021 3/3/21 Chancellor of the Exchequer Rishi Sunak displays the red budget briefcase to waiting media on Downing Street on March 3, 2021. When he delivers his budget to Parliament, the Chancellor is expected to announce billions of pounds in tax cuts and spending increases and maintain numerous other support packages to assist workers, businesses and all citizens as the worldwide coronavirus pandemic continues. (London, England, UK)

New figures have shown that the government tax policy aimed at plugging the financial gap in health and social care will leave graduates with a basic tax rate of nearly 50% on additional pay.

The policy, laid out in parliament on Wednesday by prime minister Boris Johnson and chancellor Rishi Sunak, which increases main national insurance contributions by 1.25 percentage points to 13.5%, will leave those with student debts paying out nearly half of extra income in income tax, national insurance and student loan repayments.

From next April, people who have student debt and earn above the threshold to repay them face a 49.8% tax on any increase in pay from employers.

Alongside this revelation, an overnight analysis on the moves by the Resolution Foundation also found that the tax rises will fall disproportionately on the working-age population. 

A typical 25-year-old today will pay an extra £12,600 over their working lives from the employee part of the tax rise alone, compared to nothing for most pensioners. 

In contrast, pension and rental income will not be subject to the Health and Social Care Levy.

Read more: University students at high risk of tax scams, HMRC warns

At an event held by the Resolution Foundation on Wednesday, policy experts said that the decision to raise taxes was a political one ahead of an economic one, noting that having the working-age population pay for policies that effectively look after an aging population, and one that typically votes Conservative. 

With the new increases, according to analysts at Hargreaves Lansdown, in practical terms, someone earning £20,000 a year will pay £1,382 NI a year — up £130 from their current annual NI bill.

Someone earning £30,000 a year will pay £2,707, up £255, and someone earning £50,000 a year, £5,357, up £505.

Watch: Johnson’s £12bn national insurance hike clears the Commons

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