Chancellor in stealth tax seize on low-paid graduates

Graduates on the minimum wage face having to start repaying student loans earlier due to Rachel Reeves’ stealth tax grab, The Mail on Sunday can reveal.

The extraordinary prospect comes as the Chancellor already faces pressure to make the system fairer for students paying crippling interest on their debt.

In her November Budget, Reeves froze the salary threshold at which students begin paying back Plan 2 loans, meaning more will start paying sooner.

Money Saving Expert founder Martin Lewis said her decision ‘was not a moral thing’ to do.

Reeves froze the salary level at £29,375 for three years from next year. The move – known as fiscal drag – means graduates earning more than this will be pulled into larger repayments on their loans than if thresholds had risen in line with inflation.

Students repay 9 per cent of what they earn above the threshold in what critics say is in effect a graduate tax. But if the National Minimum Wage, which will rise from £12.21 to £12.71 an hour this April, increases at the same rate for three more years it would breach the student loan repayment limit for even the lowest-earning graduates working a 40-hour week.

‘By the end of the freeze, we may well see graduates working full-time at just above the minimum wage starting to make repayments towards their Plan 2 student loans,’ said Kate Ogden, an economist at the Institute for Fiscal Studies think-tank. ‘This was not intended when these loans were first introduced.’

Graduates typically earn more than non-graduates, but the gap has narrowed dramatically.

The graduate pay premium over minimum-wage salaries in England has halved since 2007, according to financial news firm Bloomberg. In 2024, graduates aged between 21 and 30 earned £1.43 for every pound earned by a minimum-wage employee doing a 40-hour week.

But the figure shrinks to just £1.32 of post-tax earnings after repayment of student loans.

The findings come as graduates face the toughest job market in years, with firms reluctant to hire due to rising employment costs, notably higher National Insurance, rises in business rates and new rights for workers. Artificial intelligence also threatens entry-level roles in key hiring sectors such as finance, accountancy and legal services.

Youth joblessness is at its highest in 11 years at 16.7 per cent. The number of those out of work overall is at a five-year peak.

The freeze in thresholds means graduates as a whole will pay an extra £9,300 on their student debts, according to a report out tomorrow by the Centre for Economic and Business Research.

The average student graduating in 2022 will now repay nearly £70,000 until their balance is cancelled, the centre estimates.

Oliver Gardner of campaign group Rethink Repayment said it ‘simply isn’t fair’ that the lowest-earning graduates face a marginal tax rate of 37 per cent.

‘This is hugely demoralising, and will further damage their future by punishing them for trying to earn more,’ he added.

A Government spokesperson insisted the system ‘protects lower-earning graduates’, adding: ‘Threshold freezes have been introduced to protect taxpayers and students now, alongside future generations.’