Savings rate cuts on the horizon – what you should do

The Bank of England Monetary Policy Committee (MPC) continues, for now, to hold the base rate at 5.25% after a run of fourteen consecutive interest rate hikes.

However, inflation is now slowing back toward the Bank of England’s target of 2%. What does this mean for savings rates?

If the bank does cut its main rate, then the savings market will follow suit and likely slash savings account offers. This will have a negative impact on any cash held in these kinds of accounts, particularly if that money is set aside for long-term goals.

The MPC will want to be sure receding inflation is a robust trend before it makes its first cut, but with the UK’s economy at a standstill at best, it is increasingly likely we’re in for a cut in the next few months.

What does that mean for cash?

Savings rates currently higher than usual because inflation has been high too. There is one main lever the Bank of England can pull to combat that inflation: hiking the base rate.

Now that inflation is slowing considerably, the bank is actively considering easing off this lever. This will directly impact the cash savings market as these rates take their lead from the bank’s main policy rate.

Is cash really king?

 Cash plays a role in a diversified financial portfolio. Key is ensuring it is being put to the right use and at the appropriate life stage.

Reliance on cash increases in retirement as you start to draw an income from your retirement pot rather than your salary. You may opt to hold some cash in savings and fixed term deposit accounts to meet certain income needs.

Using cash in this way means you don’t have to sell other investments if the market conditions are not favourable at that time.

Likewise, if you know you have a big outlay in the next 12 months, holding cash in an easy access savings account makes sense.

So, cash is definitely ‘king’ when it comes to providing short-term access to the means to cover emergencies and short-term spending needs.

Investing, however, is a much more valuable way to ensure your financial goals are met over the long term.

Holding some cash as part of a wider investment portfolio can give more flexibility in times of market volatility – both in cushioning against potential losses and increasing the opportunity to take advantage of buying unusually cheaper assets, without having to sell first or wait for a sale to complete.

However, ultimately this needs to be just one part of a much wider investment portfolio that is prepared for long-term growth and income generation.

What is the right amount of cash to hold?

There is no one ‘right’ answer. As the question ‘how much cash should I hold in my portfolio?’ sits firmly in the ‘how long is a piece of string?’ camp.

With rates on cash set to fall, minimising your cash requirements is important to ensure your overall portfolio has the best opportunity it can to meet your goals.

Everyone has their own investment goals and timeframes, their own risk tolerances, different income sources – taken together, those factors will determine how much cash is the ‘right’ amount to hold for your personal circumstance.

If in any doubt about how you should be using cash in your portfolio, contact your financial adviser so that you can be safe in the knowledge the cash you hold is indeed at the right level and in the right place for you and your stage in life.

Rainy-day funds – how to manage an emergency cash pot

Having a rainy-day fund is a lesser discussed but still important aspect of managing a wider investment portfolio.

It can seem counterintuitive to think cash might have a role within a wealth growth strategy that needs stronger growth opportunities over the long term in order to meet your financial goals.

However, cash does have a role to play and central to that is a rainy-day fund.

What is a rainy-day fund?

A rainy-day fund is a pot of cash you can draw upon in times when you need quick access to cash.

What this ‘need’ is depends on your personal situation. At one end it could be for a small emergency such as your car breaking down and needing a costly repair.

At a more severe end of the spectrum a rainy-day fund can give you protection and breathing space were you to lose your job through redundancy or have a loss of income for any other reason.

A rainy-day fund is also relevant in the context of retirement income. If you’re reliant on the income from your investments to fund your lifestyle, then this can sometimes come with market fluctuations that affect your portfolio.

In this regard, a rainy-day fund is important because it can help you access cash reserves when investment markets are down and prevent you needing to sell assets and crystallising losses unnecessarily.

How to structure a rainy-day fund

The first question to ask yourself with the fund is how much you think you might need. Once you’ve met this target, make sure to revisit the amount you have in the pot to ensure it keeps up with your changing costs.

Remember, putting too much of your assets into cash can have a negative impact on your wealth growth, so there should be a limit to what you might need to get by in an emergency, or in the short term.

In terms of where you keep your rainy-day fund, easy access savings accounts will be your first port of call. While interest rates on such accounts are better than they used to be, they are likely to come down in the near future, heightening the need for a limit on how much exposure to cash your portfolio has.

For the purposes of a rainy-day fund, easy-access savings accounts are better than a current account because typically they will pay better rates, while still being readily accessible.

Such accounts are also protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 per eligible person, per bank, building society or credit union.  If you intend on having more than this set aside in cash, then it is essential to divide it up into different accounts.

When it comes to whether you should keep this cash within a tax-free ISA wrapper – it is important to consider that within the wider context of your portfolio.

The ISA allowance should chiefly be set aside for long-term investments rather than short-term cash funds. Your long-term earning and growth potential will be much better served by the tax-free protection an ISA offers.

Savings come with a tax-free £5,000 incentive on earnings from interest, but you’ll only be eligible on this if your other earned income is below £17,570. This includes your personal allowance of £12,570 so for every £1 you earn above the personal allowance you’ll lose £1 of savings interest allowance.

If you’d like to consider how best to structure this it is important to discuss with a financial adviser first in order to ensure your wealth, be it cash or investments, is organised in the most efficient way possible and to ensure you can hold cash for a rainy day without it having a detrimental impact on the long-term prospects for your portfolio.

New tax year checklist – ISAs and tax efficient savings allowances to consider now

The new tax year is upon us, and with it a whole host of new rates, charges and allowances to consider when it comes to best management of your financial portfolio.

There is a lot to consider when it comes to the allowances available and the potential pitfalls of tax charges, rates and limits, so it is important to seek professional financial advice if you need help to make the most of the opportunities.

Here is a key checklist of new tax year allowances, benefits and pitfalls you should be aware of.

Pensions lifetime allowance

The pensions lifetime allowance (LTA) has finally been fully abolished and replaced by new rules. Although the first step was made last year to remove the charge associated with the LTA, it has now been fully abolished by law.

This means, currently, there is no limit on how much you can accrue into a pension. There are, however, two new allowances that you should be aware of that have replaced the old one.

First of these is the lump sum allowance (LSA). This caps the tax-free lump sum at £268,275. This means in effect that the tax-free lump sum you can take from your pension is now 25% – up to a limit of £268,275.

The second allowance is the lump sum and death benefit allowance (LSDBA). This is set at £1,073,100. This allowance is relevant when a pension is paid out on death or due to serious ill-health.

The caveat to these new rules is that while this is the current regime, it might not last long. The UK is due to have a General Election between now and January 2025 – which the Labour Party is expected to win. Labour has committed to reversing the removal of the LTA, although it has been warned this would be difficult and complicated.

The party has already been forced to admit it won’t be able to create profession-specific lifetime allowances (for instance, for headteachers and doctors), one of the key concessions and reasons for the LTA abolition in the first place. It remains to be seen what will actually happen.

National Insurance

Jeremy Hunt cut National Insurance for the second time at his most recent Budget. The two cuts in tandem bring National Insurance down from 12% in 2023 to now just 8%.

Hunt has said his ambition is to remove the charge completely, but this is unlikely to happen in the next 12 months.

Reducing rates of National Insurance while maintaining income tax thresholds to increase revenues – a phenomenon known as fiscal drag – is increasingly pushing the burden away from workers and onto retirees. This is because only people in work pay National Insurance – but everyone pays income tax on earned income. As such it is essential to use tax-free allowances in tax wrappers such as ISAs for your wealth and income to minimise the income tax liabilities.

Child benefit

For anyone with a young family and on a higher income, the Chancellor made some key changes to child benefit that could have a positive impact on your income.

Child benefit is paid at £25.60 a week for the eldest child and £16.95 per week for each subsequent child. Until 2023/24 child benefit entitlement was capped at £60,000 of income per parent. Beyond £50,000 the Government tapered the entitlement which meant the higher your income was above £50,000, the less you’d receive. If one parent’s income was above £60,000 then the benefit was withdrawn completely.

Now, however, the thresholds have been shifted. Child benefit entitlement is available for anyone earning up to £80,000 – with the taper starting at £60,000. This means the taper only limits child benefit at half the rate of the previous taper as your earnings increase.

Even if you don’t need the extra cash, it is worth claiming as the money can be set aside for a rainy day or put to use elsewhere. Just be aware if you earn over £60,000 then you’ll have to file a tax return and HMRC will claw back some entitlement – so ensure you set aside money to pay the tax bill.

The Treasury is also looking at changing how households are assessed for child benefits, but this is not set to come into effect until 2025/26. For instance, one family where a parent earns £80,000 and the other earns nothing will receive no benefits. However, a family where two parents both earn £60,000 – for a combined income of £120,000 – will receive the full benefit.


There has been no change to the current overall ISA allowance for 2024/25 – but this is something to be aware of in and of itself. As with income tax thresholds that have been frozen, the ISA allowance has been held at the same level for several years now – leaving cash exposed to fiscal drag.

It is essential, with the further clampdown on Capital Gains Tax (CGT) and dividend allowances, to ensure you’re maximising your ISA allowance every year. This is also essential from an income tax minimisation perspective too, as mentioned above.

Capital Gains Tax and dividend allowances

The Capital Gains Tax (CGT) allowance has been cut in half for tax year 2024/25. Last year it was set at £6,000 and is now just £3,000. This follows on from a cut from £12,300 the year before, marking a substantial squeezing of the allowance for capital gains.

Similarly to CGT, the dividend allowance has been slashed in half, to just £500 for 2024/25. What is essential here is to look for ways to mitigate the effects of CGT and dividend taxes. This is best done in a product such as an ISA which is sheltered from both.

If you would like to discuss any of these key allowances, changes or liabilities don’t hesitate to get in touch with us to discuss your options.

The World In A Week - First mover advantage

Written by Millan Chauhan.

The latest figures released by the Commerce Department Bureau of Economic Analysis in the U.S. revealed that the personal consumption expenditure (PCE) price index figure increased by 2.4% in the 12 months to January 2024, in line with expectations. The core PCE price index (which excludes food and energy) rose 2.8% in the 12 months to January 2024. If you remember in mid-February, it was announced that US inflation figures for  the 12 months to January came in at 3.1% which was above expectations of 2.9%. The U.S. market responded positively to the latest PCE price index figures and the fact they were in line with expectations, as the S&P 500 returned +1.4% last week in GBP terms. The Federal Reserve are set to meet on the 19th-20th March where it will decide the trajectory of U.S. interest rates. We are set to receive one further U.S. inflation print on March 12th, ahead of this much anticipated meeting.

Elsewhere, in Europe, the inflation rate declined to 2.6% in the 12 months to February 2024, slowing from 2.8% in the previous month, however this was still above expectations as inflation is proving to be stickier than initially expected. Energy prices declined 3.7% over the month but food, alcohol and tobacco inflation remain high at 4% and services inflation still remains at 3.9%. Core inflation in Europe was announced at 3.1% with expectations at 2.9% and is a critical measure used by the European Central Bank who are set to meet this Thursday where expectations are that interest rates will be held at 4.5%.

In the UK, house prices increased for the first time since January 2023 according to Nationwide’s House Price Index which rose 1.2% in the 12 months to February 2024 as borrowing costs declined.

There has been much speculation as to what the UK Budget has in store for us with talks of cuts to personal taxes and national insurance. The Chancellor of the Exchequer, Jeremy Hunt is set to unveil his list of measures on Wednesday.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 4th March 2024.
© 2024 YOU Asset Management. All rights reserved.

HMRC in clampdown on ‘side hustle’ tax dodgers

Brits selling second-hand goods or letting out their property online are being targeted by the taxman as part of a clampdown on those not declaring second incomes.

Under the new measures, online marketplaces such as eBay, Amazon, Etsy, Depop and Vinted will be required to report how much money their users are making and report it to the UK’s tax authority.

The new measures are an attempt to weed out those who are making taxable income on a so-called ‘side hustle’ that they have not declared.

An HMRC spokesperson said: “These new rules will support our work to help online sellers get their tax right first time. They will also help us detect any deliberate non-compliance, ensuring a level playing field for all taxpayers.”

Who is affected?

The crackdown is aimed at those who make a second income of more than £1,000 a year online, such as selling secondhand clothes on sites such as Depop and Vinted, letting out their property on Airbnb or delivering takeaway food for the likes of Deliveroo.

Once sellers pass the £1,000 threshold, they may have to register for self-assessment and pay tax on their earnings.

Does that mean I will have to pay tax on things I sell online?

Not necessarily. It all hinges around whether you are deemed to be a ‘trader’ or not, according to the Low Incomes Tax Reforms Group (LITRG).

For example, if you’re selling unwanted personal items such as old children’s clothes or toys online as a one-off, then you are unlikely to be deemed to be ‘trading’, LITRG says. These types of transactions are ‘generally not taxable’, even if you make a significant amount of money, it adds.

However, you may be liable for tax if this is deemed a regular activity and you’ve crossed the £1,000 threshold.

When does it come into effect?

The new rules came into effect on 1 January, although online marketplaces will not start reporting user data to HMRC until January 2025.

Why has this been introduced?

The market for second-hand goods, particularly fashion items, is booming. Websites such as Depop and Vinted have reported surging sales at a time when many fashion retailers have struggled.

A recent report by US marketplace ThredUP suggested the global market for second-hand apparel alone could more than double to $350bn (£276.3bn) by 2027.

Given that many of those who sell on these marketplaces are individuals and not businesses, it has led to concerns that many are not paying tax when they should.

Is this a new law?

Yes and no. There are technically no new tax obligations on individuals: if you made £1,000 or more selling goods online before now and were deemed to be ‘trading’, you likely already had to pay tax on it.

The major change announced this month is the requirement for online marketplaces such as eBay and Amazon to report their users’ data to HMRC routinely.

Do I need to do anything?

Victoria Todd, Head of LITRG, says: “The new rules have caused a great deal of confusion, but they simply mean that HMRC are receiving more information from online platforms than they were before. If you are following existing rules and declaring your income as required, then you don’t need to worry or do anything differently.”

However, if you are unclear whether you should be paying tax on income from goods you sell online, then it’s worth contacting HMRC as soon as possible.

Tax year end: Strategies to safeguard your finances

As the end of the current tax year draws near, we are about to enter the third year of the six-year freeze on income tax thresholds, a move that has significantly altered the fiscal landscape. The proportion of adults paying higher rates of income tax has risen from 3.5% in 1991-92 to an expected 14% by the 2027–28 fiscal year, according to the Institute for Fiscal Studies.

For those recently finding themselves in the higher tax bracket, as well as for those who have been navigating this territory for some time, here are four key strategies to help manage your finances more effectively and reduce tax liabilities:

1. Maximise pension contributions: Contributing to your pension not only prepares you for a secure future, but also offers immediate tax benefits. For higher-rate taxpayers, there is £40 in government tax relief available for every £100 contributed. It’s important to remember that while pension withdrawals are taxable, up to 25% can be taken as a tax-free lump sum, offering a strategic advantage in tax planning and potentially placing you in a lower tax bracket upon retirement.

2. Utilise pension contributions to preserve Child Benefit: For earners exceeding £50,000, the High Income Child Benefit Charge applies, progressively reducing Child Benefit. By making pension contributions, you can lower your taxable income, potentially mitigating or completely avoiding this charge, thus preserving your Child Benefit.

3. Invest in tax-efficient savings: With forthcoming reductions in capital gains and dividend allowances, ISAs and pensions become even more attractive as tax shelters. These vehicles allow you to fully utilise your annual allowances and protect your gains from tax liabilities.

4. Leverage spousal allowances: Married couples enjoy the benefit of double the allowances for ISAs, capital gains, personal savings, and dividends. Transferring assets between spouses can maximise the use of these combined allowances, offering potential tax savings and enhancing your financial strategy.

Beyond these strategies, keeping abreast of changes in tax regulations is crucial. The tax environment is constantly evolving, highlighting the need for dynamic financial planning and expert consultation.

Seeking tailored advice?

We are committed to empowering you with the knowledge and resources necessary for informed financial decision-making. Whether it’s tax planning, pension contributions, or investment strategies, our team is here to provide personalised guidance suited to your unique financial situation.

Contact us

Whether you’re an existing client or new to our services, we’re equipped to support your tax year-end planning and set you up for the year ahead. Why not arrange a meeting with one of our advisers, providing an opportunity to see how our bespoke advice can meet your financial needs. Book your session today to begin shaping your financial future.

Important: When investing your capital is at risk. The value of pensions and investments may fall as well as rise. Tax treatment varies according to individual circumstances and is subject to change. Tax advice is not regulated by the FCA.

The World In A Week - No roses – just recessions and rising inflation

Written by Ashwin Gurung.

Last week, the official data showed that at the end of last year both the UK and Japan economies fell into a technical recession. This was an outcome neither of the nations anticipated, marked by two straight quarters of negative economic growth. The US economy was also taken aback by hotter-than-expected inflation numbers.

The UK economy contracted once again in Q4 2023 by -0.3%, more than the market consensus of -0.1%, following a contraction of -0.1% in Q3 2023. The officials reported that in Q4, all major parts of the economy declined, with manufacturing, construction, and services having the greatest negative effect on growth. This is the first time the UK entered a recession since COVID-19 plummeted the economy in 2020. Meanwhile, the inflation rate remained unchanged, with the Core Consumer Price Index (CPI) holding steady at +5.1%, but below expectations, which renewed the hope that the Bank of England (BoE) will cut rates sooner. However, BoE Governor, Andrew Bailey, played down the GDP data before its release and said that the BoE is seeing signs of an “upturn” in the economy and the fall in the GDP looked “very shallow”. The Retail sales numbers released on Friday appear to have validated his statements, which rebounded +3.4% month-over-month, after a sharp fall of -3.3% in December.

Similarly, in Japan, the economy unexpectedly contracted -0.1% in Q4 of 2023, coming in below consensus of +0.3% growth, causing the economy to fall into recession for the first time in five years, as domestic demand declined. Consequently, Japan lost its position as the third-largest economy to Germany. While the weakening Yen coupled with a positive corporate earnings release supported the Japanese equity market last week, the Bank of Japan (BoJ) now faces challenges in supporting the economic growth as well as the currency.

Meanwhile, in the US, the unexpected rise in inflation dampened investor sentiment and briefly drove the US market lower. Core inflation, which excludes volatile items like food and energy, rose +0.4% for the month, contributing to a year-on-year increase of +3.9%, well above the Federal Reserve’s (the Fed) target of 2.0%. A significant factor driving this inflation was the rise in housing and rent prices over the past year, increasing by +6.0%. These items account for nearly one-third of the overall CPI basket. However, it is important to note that these factors are considered very lagging data points and does not represent the current conditions. Nonetheless, US stocks rebounded over the week.

This week, the investors will be looking forward to the Fed’s latest minutes on any new insights on the direction of the monetary policy. Additionally, an eagerly awaited earnings report from Nvidia is set to be released on Wednesday, which could have a potential impact on the market sentiment, given that much of the recent rally in the US equities has been fuelled by optimism surrounding Artificial Intelligence (AI).

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 19th February 2024.
© 2024 YOU Asset Management. All rights reserved.

The World In A Week - Have we reached the summit?

Written by Shane Balkham.

UK inflation fell to below 5% in October, on the back of a sharp decline in energy costs.  The monthly publication from the Office of National Statistics (ONS) showed a 2.1% drop in UK Consumer Price Inflation (CPI) from 6.7% for September to 4.6% for October.

A significant contributor to this fall was the fall in energy prices; over the year to the end of October, gas prices fell by 31% and electricity prices fell by 15.6%.  Food prices were little changed for October.

This is a positive step bringing inflation back down to the Bank of England’s (BoE) target level of 2%.  There are another three weeks until the Monetary Policy Committee of the BoE meets to discuss the path of UK interest rates, and it remains a delicate balancing act.

The US also had a pleasant surprise for inflation, with a fall greater than expected.  US CPI for October fell from 3.7% to 3.2%, which was marginally below consensus expectations.  The reaction of the US market was one of relief, with US Treasury yields falling and the stock market rallying.

Some commentators believed that this was an overreaction by investors and while inflation is certainly heading in the right direction, there will be challenges ahead.  The US Federal Reserve meets a day earlier than the BoE, with the next decision on interest rate policy coming on 13th December.

It makes sense that the reaction from markets on October’s inflation readings was one of relief.  However, central banks are known for not necessarily doing the right thing at the right time, and although there is optimism that we have reached the peak in the interest rate hiking cycle, we are still treading carefully in our investment decisions.

From policymakers to politics, where the US House of Representatives voted to avert a costly government shutdown last week.  In a similar move to that of six weeks ago, the can has been kicked down the road until early in the new year.  The proposal provides a two-step plan that sets up two new shutdown deadlines next year.  US government funding has been divided into two different parts, with priority given to military construction, transportation, housing, and the Energy Department, which has a new deadline of 19th January 2024.  Anything not covered in this first step would be funded until 2nd February 2024.  Politics will certainly start the New Year in the spotlight and will likely remain there.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th November 2023.
© 2023 YOU Asset Management. All rights reserved.

The World In A Week - Summer Prints

Written by Millan Chauhan.

Last week, we saw the release of US inflation data where the US Consumer Price Index reached 3.2% on a year-over-year basis as of July 2023 which was below expectations of 3.3%. Inflation has fallen significantly from its highs of 9.1% in June 2022. Food was one of the largest contributors to July’s monthly inflation print of 0.2%. Food at Home costs rose 3.6% and Food Away from Home costs rose 7.1% on a year-over-year basis. Attention now turns towards the UK and Continental Europe where we await July’s inflation data readings on Wednesday and Friday respectively. In the UK, analysts expect to see inflation fall to 6.8% and in the Euro Area to 5.3%, both on a year-over-year basis for July 2023.

Over the last 15 months, we have seen central banks implement several interest rate hikes, which has caused commercial banks to raise the interest rate received on deposits by savers. Some banks have been slower to increase the interest rate received than others. Last week, the Italian Government stepped in to penalise banks for failing to pass enough of the interest hikes from the European Central Bank (ECB) to depositors, it initially stated that it would tax 40% of net interest margins in 2022 or 2023 which initially saw numerous Italian banks sell off sharply. The announcement was a shock to investors and was widely criticised. Subsequently the Italian Prime Minister, Giorgia Meloni backtracked the decision and clarified that any levy applied would be capped to 0.1% of assets.

The UK’s Gross Domestic Product (GDP) grew 0.5% in June 2023 which was above expectations of 0.2%. The extra bank holiday has been cited as a key driver; however, we have also seen production output grow 1.8% in June 2023 which outpaced the Services & Construction sectors. June’s strong economic growth data saw the UK’s Q2 GDP grow by 0.2%.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th August 2023.
© 2023 YOU Asset Management. All rights reserved.

student loan changes

Should you pay your child’s student loans?

As the university year ends and a fresh crop of students graduate, should you look to help your child with their loans, or even the costs if they are yet to attend?

As a parent with young adult children, you’ll be acutely aware of how much it costs to go to university these days. Day-to-day living costs aside, the maximum fees for university now stand at £9,250 per year in England. This cost is compounded by interest rates, which have risen massively since the Bank of England began its rate hikes in December 2021. Those on Student Loan Plans 1 or 4 pay 5.5%, while Plan 2 and postgraduate loans pay an eye-watering 7.1% currently.

As a parent, if you have the means to help a child with the cost of tuition fees, you might wonder if it is a good idea to pitch in. However, there are some important aspects to consider before doing so, that will affect both your child and your wealth planning.

How student loans work

To get to grips with whether you should soften the blow of student loans for a child or grandchild, it is essential to understand how the system works. Student loans and student debt does not function like normal debt. It does not affect a student’s credit rating, other than for overall income considerations when applying for a mortgage. Payment for the loan is taken at source, meaning there’s no need to manage the loan like you would with a normal debt. In effect, student loans actually function as a form of income tax levy. Once someone earns above a certain threshold, the Government deducts a portion of their wages to pay back the loan.

Here are the various income thresholds depending on the plan the student is on:

Plan type Yearly threshold Monthly threshold Weekly threshold
Plan 1 £22,015 £1,834 £423
Plan 2 £27,295 £2,274 £524
Plan 4 £27,660 £2,305 £532
Plan 5 £25,000 £2,083 £480
Postgraduate Loan £21,000 £1,750 £403

Source: student loans repayment

As for how much you pay, this is calculated as 9% of your income over the threshold for plans 1, 2, 4 and 5. For postgraduate loans it’s 6%. This interest rate, in effect, is the additional income tax levy that the student with the loans takes, once they earn enough money. The debt is cancelled after either 25 years from the first April they were due to pay, or by age 65, depending on the plan. What is really critical here is that, because of the payment threshold and time limit on repaying, it doesn’t really matter how much debt the student has. They could have £30,000 or £3 million – they will only ever pay 6-9% of their income above the threshold of earnings. This is all entirely contingent then on what kind of career and income the student ends up having. Someone earning a lower level of income will pay less overall, whereas someone who goes on to earn a much higher income will pay much more of their loan back, or even all of it.

Other ways to help

The big question to ask yourself then is whether you want to help your child or grandchild avoid having to pay what is in effect an income tax levy on their earnings. Of course, if you do help this will aid their month-to-month earnings potential, but this is by no means a given depending on their career choices. There are other really valuable ways to help your child instead that could help them to achieve other goals such as owning a home. Contributing toward a house deposit could lower their mortgage costs and improve the options available to them in terms of property.

Other ways to help include gifting, which if done carefully following IHT rules, can be an effective way to help your child with ongoing living costs in small bitesize chunks. Putting money into a pension for your child can be a great long-term solution too, as this is often one of the most difficult things for a young person starting out in their career to appreciate the importance of.

Finally, if your kids are still younger and you’re just thinking about the future then contributing to a junior ISA can be a great way to set them up for success in young adulthood.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th July 2023.