Full-time pay rose 5.8%: Plan 2 graduates keep 63p per extra £1

Losing 37p from every extra £1 is a meaningful hit to a graduate’s pay rise. The salary goes up on paper, but the improvement in their monthly budget can feel much smaller once tax, NI and student loan repayments are taken.

I would never tell parents to automatically clear a Plan 2 loan. It is income-contingent and any remaining balance is normally written off after 30 years, so somebody who may never repay it in full could gain very little from an early repayment.

For many young people, parental money towards a first-home deposit could transform their finances far more.

The exception is a high earner who is clearly on track to repay the loan in full. Then paying it down early can potentially save interest.

Student debt is not normal debt. Work out whether it will actually be repaid before throwing family money at it.

Plan 2 graduates earning £29,385–£50,270 hand back 37p of every extra pound with 20% tax, 8% National Insurance, 9% student loan, keeping just 63p. Critics say that’s a work disincentive with thresholds frozen; supporters call it a fair contribution above a sensible income. Either way, Plan 2 is really a 9% graduate tax, written off after 30 years, and roughly 80% of graduates never repay in full. So, a house deposit beats overpaying the loan almost every time as it cuts mortgage rates and builds equity, while overpayments often clear debt that would be cancelled anyway. English graduates enter repayment owing around £53,000, and a standard graduate still earns roughly £5,700 more a year than someone on the National Living Wage.

Is 37p too much? Honestly, sit in on a few pay reviews with me and you’ll have your answer.
Here’s how it goes. A small firm finds an extra £1 for someone. Employer NI takes that to £1.15. The graduate keeps 63p. Over half of it vanishes somewhere between my account and theirs. The pay rise is real. The take-home rise is a rumour. And it doesn’t land evenly. The big corporates shrug and let their benefits team soften the blow. My clients, the corner shop, the salon, the five-person agency, just get the bill and a headache. It’s the same for staff. If you’re comfortable, losing 37p is annoying. If you’re juggling rent, food and fuel, it’s the difference between coping and not. I’ve watched people open a payslip after a rise and genuinely ask me if there’s been a mistake. So, Chancellor, a little wish list from me. Leave more of the rise with the worker, give small firms a fighting chance, and please stop treating pay rises as a tip jar.

Keeping 63p of an extra pound is a tough deal for graduates trying to cover rent and save for a deposit. A pay rise still leaves them better off, but the headline increase can feel a long way from what reaches their bank account. The Budget needs to consider that combined burden.

For parents able to help, I wouldn’t assume clearing the student loan is the best use of the money. The key question is whether their child is likely to repay it in full before it is written off. Paying down a balance that would otherwise be cancelled could achieve very little.

Help with a deposit may make a more immediate difference, provided the mortgage is affordable. Clearing the loan can make sense for some higher earners, but families should compare the likely lifetime repayments with the housing benefit before committing. Parents also need to protect their own financial security.