This is a brief post to show marginal tax rates for the 2010/11 tax year, and to compare the rate of how much tax two different graduates pay, one from before and one from after student loans were introduced.
The marginal tax rate is another way of saying, if you earn an extra £1, how much of that money is deducted from you in taxation and therefore, how much do you get to keep.
A marginal tax rate of 40% essentially means, if you earn an extra £1, of that you get to keep 60p, and 40p is deducted as tax.
Since class 1 National Insurance Contributions (hereafter NICs) are a tax in all but name, and student loans are repaid at a rate of 9% on earnings above £15,000, both of these can be added to income tax to give a fair view of the real tax being deducted from employment income.
Now I’m going to compare two fictional people, both of whom went to University, but one from before student loans were introduced, the other after.
From looking at the graph shown below, you can see that a recent graduate earning more than £15,000 has a marginal tax rate of 40%. This is made up from 11% NICs, 20% income tax and 9% student loan repayments.
Compare that to the graduate prior to student loan introduction, who received a grant, or was in effect paid to go to university, and has now secured a well paid job earning £99,000 a year. Not only was this person paid to go to University and has no student loan to pay back, but this person has a marginal tax rate of 41%. 1% NICs and 40% income tax.
That is, for every extra £1 earned, he would have to pay an extra 1p in tax compared to a recent graduate with a student loan to repay, earning £84,000 a year less.
I would hope that anyone can see this is a fundamentally unfair system.