Could the minimum wage increase catch graduates off guard with student loan repayments?

With the National Minimum Wage climbing to £12.21 per hour in April, businesses may face unexpected ripple effects, especially those employing graduates in non-graduate roles.

While the pay rise is great news for workers, it brings with it a lesser-known consequence: the potential for student loan repayments to kick in due to increased earnings.

Understanding student loan repayments

Repayments for student loans are triggered once earnings surpass set thresholds, which depend on the loan type. Graduates typically repay nine per cent of income above these limits:

Plan 1: £24,990 annually

Plan 2: £27,295 annually

Plan 4: £31,395 annually

Plan 5: £25,000 annually

Postgraduate Loans: £21,000 annually (six per cent repayment rate)

A graduate working 36.8 hours a week at minimum wage won’t typically hit the threshold, but add just a handful of overtime hours, and repayments could begin.

The impact on businesses

Although the responsibility for student loan repayments falls to employees, businesses should take note.

Many graduates may be unaware that overtime could nudge their earnings above the repayment threshold.

The resulting deductions, combined with National Insurance and Income Tax, could create an effective tax rate of up to 37 per cent on additional income.

This unexpected reduction in take-home pay might affect staff morale, particularly in non-graduate roles.

Steps employers can take

Employers have a vital role in supporting employees through these changes. Here’s how:

Highlight how increased hours or overtime might lead to loan repayments. Providing this clarity upfront, during onboarding or reviews, can prevent misunderstandings.

Offer resources or workshops to help employees understand deductions, earnings, and repayment obligations. Tax-efficient benefits, like salary sacrifice schemes, could also help reduce financial strain.

Assess how extra hours affect overall payroll costs and employee earnings. Flexible hours or time-off-in-lieu might be better alternatives to avoid unexpected deductions.

Ensure your payroll system can accurately manage deductions like student loans. Streamlined systems can prevent errors and reduce stress for both employees and management.

A balancing act for employers

While higher wages improve financial stability for employees, they also introduce new business considerations.

Managing overtime, communicating potential deductions, and maintaining a happy workforce requires careful planning.

Our team specialises in payroll and tax planning to ensure businesses stay ahead. Contact us today to see how we can support you.