Another Stealth Tax In UK Budget Hits Students With Loans

2nd December 2025

The freeze of the Plan 2 repayment threshold in the UK budget has quite a few implications for students and recent graduates. Some are calling the change another stealth tax.

What changed

From April 2026 the threshold for Plan 2 loans is set at £29,385 per year.

From April 2027, that threshold will be frozen for three years (i.e., it won't rise in line with wages or inflation until ~2030).

If your income exceeds that threshold, you repay 9% of your income above it.
What it means for students and recent graduates is that more people will start repaying earlier.

Because the threshold remains fixed, as wages (or the cost of living) rise over time, people who might have been below a rising threshold will instead cross the threshold sooner even if their real earnings (after inflation) remain modest. As one advocacy group put it, this could drag in students "earning only just above minimum wage."

Repayments will come sooner, and real-terms burden will increase.

For someone on a relatively modest graduate income (say £30,000 per year), this freeze is not trivial. The think-tank Institute for Fiscal Studies (IFS) estimates that a graduate earning £30,000 will pay about £113 more in the next tax year than would have been the case before the freeze announcement.

So, over time, the real-terms cost of the loan repayment increases — effectively acting like a "stealth tax" on graduates with middling earnings.

Debt lasts longer - more interest accrues over time for some

Because repayments start earlier and the threshold doesn't rise, the portion of income above the threshold which is subject to repayment and interest thresholds will increase. This means middle-earning graduates may repay more overall, or at least begin repayments faster.

Higher cost of living + student debt = more financial pressure

For recent graduates living in high-cost areas (rent, commuting, living costs), adding earlier loan repayments on top of other pressures (inflation, housing, etc.) could make it harder to budget, save, or invest. Many critics including students’ groups like National Union of Students (NUS) — have warned this could lead to “financial hardship” for those earning near the threshold.

Less of a “soft landing” for lower earning graduates

Under a rising threshold system, lower-earning grads might stay below the threshold longer, meaning no repayments until later. With the freeze, the threshold stagnates, so even moderate income graduates may have to start repayments sooner than expected.

Longer-term & systemic implications

Effectively a “tax on graduates”: Many commentators argue that this threshold freeze is a back-door increase to repayments — effectively a tax rise by stealth for many graduates.

Reduced lifetime take-home pay
Because repayments start earlier (and at lower incomes), graduates’ lifetime disposable income could be reduced which may affect ability to buy homes, invest, or save, especially given rising living costs.

Incentive distortion
Some graduates may face a choice - accept lower take-home pay (because of repayments) or delay or avoid paying back (by earning below threshold), which could influence career choices, mobility, or even decisions about postgraduate study.

Possible deterrent for prospective students
The knowledge that repayments may start earlier and be harder may discourage some prospective students — especially those worried about financial insecurity post-graduation — from attending university.

What this means for you now as a student or recent graduate in UK

If you’re studying now, or you’ve recently graduated and expect to earn in the lower-to-middle income bands:

Plan for repayments to start sooner than previously expected — even if you’re not earning a high graduate salary.

Budget accordingly
Repayments will take effect once you earn over £29,385, and with 9% of income above that going to repayment, that’s a significant chunk if your living costs are high.

Factor in cost-of-living pressure
With inflation and possibly rising housing/rent costs, the margin between “take-home pay after costs + loan repayment” and “just getting by” may be tight.

Reconsider or carefully evaluate post-graduation plans (job, relocation, further study) in light of earlier loan repayments.