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Finance for School Leavers in England – Your Need to Know Guide

With students all over Essex, Hertfordshire and the whole of England getting ready to leave school, we are asking “do you know all your options?” Your next chapter should be an exciting one so be one step ahead with our “need to know guide” to help you navigate the options ahead and how they will impact on you financially.

What are you options after sixth form or college?

·      Apprenticeship

·      Employment

·      Self-Employment

·      Further education (college/university etc)

Each of these choices have different financial implications – find out which one is best for you by scrolling down or click on our leaflet below.

Apprenticeship Explained

Did you know you can earn a salary & work while you study? An apprenticeship is just this. The government has recently published a number of incentives to encourage employers to offer apprenticeships. Many employers who followed a “graduate-only” policy are now making apprenticeships available, so if you have a clear idea of the career you want to pursue, an apprenticeship is worth checking out.

You will typically sign up for a number of modules which could take 2 or 3 years to complete. These will usually allow you 1 or more days a week of full-time study at a local college, which will be paid for by your employer as part of your package. You will be an employee in full-time employment whilst undertaking your apprenticeship (see Employment section) & you will earn a salary. An apprenticeship salary can be lower than ‘normal’ employees’ salary as the employer is paying for you to study as well as to work.

Here are some useful websites to help you find an apprenticeship:

https://www.gov.uk/apply-apprenticeship

https://www.ucas.com/apprenticeships-in-the-uk

Employment Explained

This is where most students are likely to end up, either directly from leaving school (this would include apprentices) or after leaving further education. Either way, this can be an intense transition because you will be moving from education to employment and having to adjust to often working 5  days a week for 7-8 hours a day with only 4 or 5 weeks holiday a year.

You need to understand that earning an annual salary of £24,000, for example, will not mean that you will have £2,000 per month available to spend. See the section on Tax & National Insurance for further details on this.

Self-Employment Explained

Instead of going to work for someone else, you may instead decide to set yourself up in business. Self-employment can cover a wide range of activities. You may have attended an art college and decided to make a living as a sculptor or perhaps become an IT consultant for a few different companies.

This method of earning a living can be particularly demanding. Unlike employment, if there is no work available you will not be earning anything. It can also take a long time to establish a business and generate customers, so you may need to borrow money to get yourself set up and cover that early period. You will also need to keep business records and deal with your own tax matters. You will also need to consider whether you require business insurance and you may want to open a business bank account.

Getting advice from your parents & friends is helpful & if possible, speaking with any professional advisors, such as accountants, bankers, insurance brokers, solicitors and other professionals is also highly recommended before you start up a business.

Local growth hubs & Government/Council run initiatives that offer free advice to start-up businesses.

Below are some useful local websites:

Hertfordshire Growth Hub

Wenta

University

As you are living in England you will need to pay for the cost of tuition and will need to consider accommodation & living costs. Most universities charge the maximum they can of £9,250 per annum for tuition costs.

As well as tuition costs (unless living at home) you will also need to pay for your accommodation and other living costs. Typically, these could come to £8,500 per annum (or perhaps around £11,000 if you are studying in London).

A typical 3 year course at university could therefore cost you nearly £55,000 even if there are no increases year-on-year. The Student Loan Company (SLC) will provide a loan to cover tuition costs. They will also provide loans to cover living expenses, but these will depend upon your parents’ income. If you are living away from home, you can borrow up to a further £12,010 a year, this will be issued to you at the start of each term (you will need to budget to ensure you don’t spend it all too early)

If you borrow the maximum amount for tuition and living costs (outside London) this will amount to £21,260 a year, or £63,780 over a typical 3 year degree course.

While you are studying at university, the SLC will add interest to the amount of your loan at 5.6% a year. That means the amount you will owe at the end of your first year will increase by £1,190 (from £21,260 to £22,450).

The 5.6% interest charge will continue until the April after you have finished at university. If by that time you are earning less than £27,295 per year, the interest rate will drop to 3.3% but you will not need to make any repayment of the loan. Once your income goes above £27,295 per year, the interest rate will increase, and you will need to start repaying the loan.

Therefore, if you finish university in the summer 2021, the interest at 5.6% on your loan for the 9 months or so up to April 2022 would take the balance up from £63,780 to £67,351.68.

Looking far ahead into the future, if you have not fully repaid your student loan within 30 years, the balance will be written off. If, therefore your earnings never exceed £25,000 per annum, your loan may not actually cost you anything.

More information about SLC can be found here:

https://www.gov.uk/student-finance

Tax & National Insurance Explained

The figures below will change each year when the Government sets the new rates for the tax year ahead

In this section we refer to the rates of tax and national insurance from 6 April 2021 (the 2021/2022 tax year).

You may already have come across tax & NI if you have taken a part-time job. However, unless you earn more than £184 in any week, no tax or NI is deducted from the amount you earn.

Once you go over £184 in any week, you will be required to pay NI contributions (NICs) at 12% on any amount over £184. So, if you earned £200 you would be charged £1.56 in NICs & you would only take home £198.44 instead of £200.

Once you start earning larger amounts, tax and NIC will take more of your income. In the previous section we mentioned someone earning £24,000 a year. That person would be liable to pay both tax and NIC as outlined below:

Personal Allowance – Income Tax example

The first £12,570 (known as your personal allowance) of the £24,000 earned will be free of tax, leaving £11,430 to be taxed at 20% which results in a tax bill of £2,286 in total.

National Insurance Contributions example

The first £9,568 of the £24,000 earned will be free of NICs, leaving £14,432 to be charged at 12% which is £1,731.84 in total.

Total

The total deductions will therefore be £4,017.84 so your actual take home pay will be £19,982.16 instead of £24,000. If you are paid monthly this will mean £1,665.18 instead of £2,000 per month.

There are lots of salary calculators online so if you get a job offer for £17,500 you can enter your potential salary and the calculator will tell you what your net monthly pay will be (ie the amount you get each month after the tax has been deducted).

Check out these free salary calculators:

https://www.gov.uk/estimate-income-tax

https://www.moneysavingexpert.com/tax-calculator/

The UK Tax Tool (App for your phone)

When Do You Start a Pension

Once you reach 22 years of age and earn more than £10,000 per year, you will be enrolled automatically in your employer’s pension scheme. This is ‘Auto-Enrolment’ is a compulsory scheme the Government phased in from 2012. From April 2019 that will mean that your employer will deduct 5% of your earnings from your pay & pay it over to an approved pension scheme, together will an additional 3% of your pay as the employer’s contribution.

Your employer’s pension scheme may choose to take contributions from only part of your earnings, so you need to check with them to see what the rules are.

You can choose to opt out of the pension scheme but think very carefully before you do so because you would then lose the benefit of the 3% contribution from your employer.

Even while you are younger than 22, you can apply to join the scheme, although your employer is not obliged to let you. It can make sense to make this application because the earlier you start paying into the scheme, the better pension you are likely to get when you retire.

More information from the Pensions Regulator can be found here:

https://www.thepensionsregulator.gov.uk/

Tax Rates & Pensions

The figures below will change each year when the Government sets the new rates for the tax year ahead 2021/2022

The annual tax rates for earnings are as follows:

0% on the first £12,570

20% upto £37,500

40% upto  £150,000

45% on the rest

The weekly employee national insurance rates for earnings are:

0% on the first £184

12% on £184.01 to £967

2% on the rest

We saw above how £2,000 per month reduced to £1,665.18. If you join a pension scheme based on total earnings, your contribution would be £100 a month, taking your net pay down to £1,565.18 a month.

If we move the pay up to £3,000 per month and assume there is a pension scheme and a student loan repayment, the monthly pay would come out at £2,160.

If you are employed, all of this will be taken care of by your employer, (PAYE  pay as you earn)  who will arrange the deductions and make the payments of tax to the government and the pension scheme.

If you are self-employed, you will need to do all the calculations yourself, or engage a good accountant. You will need to keep records of all your income and expenses and pass these to your accountants, so they can calculate your tax & NICs.

Your tax and NICs will most likely be payable half-yearly on 31st January and 31st July. If you start work on 1st October 2021 and prepare your first accounts to 31st March 2022, your first tax payment will be due on 31 January 2023 and will be based on your profits for that period.

You will also, at the same time, probably have to pay some tax on account for the year ending 31 March 2023, so you will need to make sure you save enough from the start to enable you to pay your tax when it becomes due.

A good rule of thumb is to put away about one-third of your profits (income less expenditure) to cover this.

The tax rates are the same for the self-employed as for employees, although the tax is only payable on profits rather than total income.

Getting on the Property Ladder

In recent years house prices have been increasing faster than inflation and faster than wage growth. The younger generation are therefore finding it harder to get a foot on the home-ownership ladder.

If parents have spare funds available, they can pay modest amounts into your bank account to help you build up a deposit for a starter property (it’s a good idea to open a separate bank account for this, so you are less tempted to dip into it).

If you are living at home, consider investing any spare money in one or more of the saving schemes introduced by the government, such as “The Lifetime ISA Account” (LISA). The government will add a bonus to your LISA savings if you use them to pay for your first home.

Link to “The Lifetime ISA Account” (LISA):

https://www.gov.uk/lifetime-isa

Unless you are particularly fortunate, you will need to take out a mortgage to help buy your property  – find a responsible financial adviser to assist you with this. Some mortgages start out with a low rate of interest for the first two or three years (the fixed rate period), so you need to be prepared for this to potentially increase once the fixed rate period is over.

Other options such as shared-ownership are a possibility but you should seek legal advice to make sure that this can be untangled if one of the owners wishes to move on, but the other does not.

Final thoughts from HB Accountants

This is a very simplified list of financial matters to help you. As your income increases you may be looking at other investments and financial planning for your own family.  By being aware of the financial implications of your life from an early stage you will be able to plan matters to your advantage as well as enjoying your life.

Good luck on your journey


                              

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The information contained above is for general guidance purposes only. Whilst every effort has been made to ensure the contents are accurate, please note that each individual has different circumstances and it is essential that you seek appropriate professional advice before you act on any of the information contained herein. HB Accountants can accept no liability for any errors or omission or for any person acting on or refraining from acting on the information provided in the above

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