8 September 2021

How the tax system squeezes graduates

Graduates earning more than £27,295 will now pay a marginal tax rate of 42.25 per cent, compared with 33.25 per cent for non-graduates.

By George Eaton

A graduation ceremony at the University of York. (Photo by Richard Baker / In Pictures via Getty Images Images)

The 1.25 percentage point rise in National Insurance announced by the government yesterday means the UK tax burden has reached its highest rate since 1950 (35.5 per cent of GDP). One particularly squeezed group is university graduates.

The UK tax system penalises graduates

Marginal tax rates for graduates and non-graduates, including the new National Insurance rise

After what amounts to a 10 per cent increase in National Insurance for most taxpayers, graduates earning more than £27,295 will pay a marginal tax rate of 42.25 per cent once student loan repayments are included (20 per cent income, 13.25 per cent National Insurance, 9 per cent loan repayments). By contrast, a non-graduate earning up to £50,270 will pay 33.25 per cent. A graduate who earns more than £50,270, meanwhile, will pay a marginal rate of 52.25 per cent, while a non-graduate earning up to £100,000 will pay 42.25 per cent.

Graduates who entered university before 2012 will pay a marginal rate of 42.25 per cent of earnings over £19,884.

In addition to the repayment rate, graduates who earn over £27,295 are charged interest of 4.5 per cent on their loans. In an environment of record low interest rates, the value of these loans is growing faster than the average mortgage, making them increasingly difficult to pay off. When combined with high housing costs and inadequate wages, such rates significantly reduce graduate living standards – but this fact rarely enters political discussion.

Is the system defensible? Supporters of fees have traditionally pointed to the “graduate premium”: the pay advantage that those who attend university enjoy over those who do not. But over the last 20 years this has fallen from 19 per cent to 11 per cent. And though universities benefit individuals, their research also benefits the economy and society (as the Covid-19 vaccine roll-out has amply demonstrated).

Viewing the issue of tuition fees through the prism of tax could reframe the debate. Labour – a party sometimes accused of never seeing a tax it does not want to raise – could boast of relieving the burden on what Ed Miliband called “the squeezed middle”. Meanwhile, the Conservatives, a party that won the support of just 19 per cent of 18- to 24-year-olds at the 2019 general election, could finally adopt a youth-friendly policy. Whatever the outcome of the debate, the stealth taxation of graduates deserves to be recognised for what it is.