In recent years, salary sacrifice schemes have become increasingly popular among UK employees as a means of reducing their tax liabilities and increasing their take-home pay. One question that often arises is whether participating in a salary sacrifice scheme can have an impact on student loan repayments. In this blog post, we will explore the relationship between salary sacrifice and student loan repayments.
Firstly, it’s important to understand how student loan repayments work in the UK. Currently, UK students who take out a student loan to pay for their university education start to repay the loan once they start earning a certain amount of money. The repayment threshold is currently £27,295 per annum for Plan 2 student loans (introduced after September 2012), and 9% of earnings above this threshold are deducted automatically from the borrower’s salary through the PAYE (Pay As You Earn) system.
Now, let’s look at how salary sacrifice works. Salary sacrifice is a scheme where an employee agrees to exchange part of their salary for a non-cash benefit, such as a company car, childcare vouchers, or a pension contribution. The benefit is paid for by the reduction in the employee’s salary, which means they pay less income tax and national insurance contributions.
So, can participating in a salary sacrifice scheme reduce your student loan repayments? Yes, if it reduces your gross pay (which I think all SS schemes should do). Let’s look at a couple of examples:
Example 1: No Salary Sacrifice – £50,000 salary, £2998 take home pay, £170 in student loan repayments
Example 2: Salary Sacrifice – £50,000 salary – Sacrificing £500 per month – Take home £2703, £125 in student loan repayments
- You’ve lost about £200 in take home pay, but contributed £500 to your pension (via Salary Sacrifice), and you are paying £45 less per month in student loan repayments.
- You’ve essentially invested the saving on student loans to go into a pension plan that should be growing. Overall this could be a much more efficient plan towards wealth.
Whether you want to reduce your payments or not is a financial decision you need to make. One could put all the excess money into a pension and live on an artificially low salary for many years to avoid repayments, in the hope it is wiped off after 25-30 years. Below a certain threshold you can also keep interest rates on it low.
It’s also worth noting that salary sacrifice schemes can have an impact on other aspects of your finances. For example, if you choose to sacrifice part of your salary towards a pension contribution, you will pay less income tax and national insurance contributions, but your pension contributions will also reduce your taxable income. This means that your overall tax bill will be lower, but your pension contributions will not be counted towards your gross salary for student loan repayment purposes.
I wrote another article on this, you can read here: https://growingmoneytrees.org/2022/08/31/how-to-reduce-your-student-loan-repayments-and-add-an-extra-250k-to-your-pension/
Below is a short video explaining: