Gen Z pension planning for the Spring Statement

The Chancellor is set to present her first Spring Statement on 26 March 2025 and many are anticipating that further difficult decisions may be announced given the challenging economic conditions. That is likely to include a focus on cutting costs to the public purse but , an aide has noted that Reeves is taking “nothing off the table” and the Treasury is refusing to rule out further tax increases.

In particular, it has been reported that some Treasury sources have indicated the “obvious thing to do” would be for the Chancellor to announce an extension to the freezing of income tax and National Insurance contribution thresholds and the income tax personal allowance. These are already frozen until April 2028 and we could see them extended by a further couple of years until April 2030.

Such a move is likely to raise billions for the Treasury as it will impact large numbers of taxpayers, pulling many into higher rates of income tax as wages grow and tax thresholds remain static. Amongst those who may be hardest hit are Gen Z graduates – those resident in England, Wales or Northern Ireland could find themselves with an effective tax rate of 51% on income over the higher rate threshold of £50,270 and limited prospect of ever being able to pay down their student loans.

Many Gen Z and Millennial graduates will be on a Plan 2 student loan scheme, meaning they will usually pay an additional 9% to HMRC as a student loan repayment if their income exceeds £28,470 from 6 April 2025. 

Based on our estimates of the potential interest rates that may apply in the coming years to an outstanding £40,000 student loan on the Plan 2 scheme, nearly all of those whose income falls between £50,000 and £60,000 during their career are likely to never pay off their student loan in full. It means that they will always face an additional 9% over the Plan 2 student loan repayment threshold until the loan is written off, unless voluntary overpayments are made. Those whose income exceeds £60,000 and are parents will also face the prospect of reduced child benefit allowance and even higher effective tax rates as a result.

Those who find themselves in these circumstances may instead be motivated to explore whether their employers offer a salary sacrifice pension scheme. This can allow for a pension contribution to be made from their gross income, before any tax or student loan repayments are deducted. Employers may also offer top-ups to incentivise pension contributions, as salary sacrifice can provide National Insurance contributions savings to employers as well. 

So rather than a Gen Z graduate potentially receiving just 49p in the pound on the higher portion of their salaries, they might instead choose to save for their retirement. That is not necessarily the outcome the Treasury will be hoping for if they do announce further freezes of allowances and thresholds, but those worst impacted by the measures may feel they are left with little choice.