Top 10 money tips for graduates and school leavers starting work.

27th August 2024

WEALTH at work, a leading financial wellbeing and retirement specialist runs financial education seminars for graduates and those early on in their career for some of the UKs leading companies, to provide guidance on managing their money and explain the many workplace benefits on offer.

With many students set to enter the workplace in September, below are WEALTH at work’s top 10 money tips for Graduates and School Leavers starting work.

1. Make sense of payslips – For those starting out in the workplace, the first payslip can be very confusing. A payslip contains important information, including someone’s payroll number, gross income (the income before any taxes and deductions have been taken out) and net pay (what’s left after deductions have been taken off), and usually a tax code. It’s important to get to grips with what deductions will be made to understand how much income will be left each month. Deductions could include tax, pensions, or Student Finance Repayments which are explained below.
2. Get to grips with Tax – Income Tax is charged on most types of income including a salary. However, people don’t usually pay Income Tax on all their income because they will typically qualify for the Personal Allowance. This is the amount of money someone can earn each tax year before they start paying Income Tax which is £12,570 for the 2024/25 tax year. Income tax is then paid at 20% on earnings above £12,570, 40% above £50,270 and 45% above £125,140.

For those who earn over £100,000, the Personal Allowance of £12,570 will be reduced by £1 for every £2 earned over the £100,000 limit. Those who earn £125,140 and over will pay Income Tax on everything, and there is no tax free allowance.

It’s important for people to check they are on the right tax code and paying the correct amount of income tax. This can be done by checking www.gov.uk/check-income-tax-current-year.

Income Tax is not the only deductions that will be made as National Insurance contributions will also be taken from a salary at a rate of 8% on earnings between £12,570 – £50,270 and 2% on earnings above this. These payments will help build an entitlement to certain benefits including the State Pension and Maternity Allowance in the future.

3. Make the most of pensions – Auto-enrolment means that all employees between age 22 and their State Pension age with earnings of more than £10,000 are automatically enrolled into their workplace pension. Currently, employers are required to make a 3% minimum contribution with employees required to pay 5% to bring the total pension contribution to 8%. Some employers pay more than the minimum contribution of 3% and employees may be able to pay less into their scheme as a result, and some match any additional contributions made by employees. Contributions made into a pension are usually free of income tax and employers who offer a salary sacrifice arrangement are also able to save employees National Insurance costs on their contributions.

This means basic rate taxpayers will usually save 20% in income tax on contributions and may save a further 8% in National Insurance costs.  However, it is widely recognised that contributions that total 8% of salary (3% from the employer and 5% from the employee) are not enough and are unlikely to provide the quality of retirement most people imagine. If employers are willing to match additional contributions it can make a significant difference to the size of the final pension pot. An additional 1% saved by someone each year, and matched by their employer into their pension can increase their final pension pot by 25%[1].

4. Appreciate the cost of delay – If someone aged 25 saved £7,000 per year into a pension for 10 years (£70,000) and then stopped contributing and left it to grow for a further 20 years, they could have £245,291 by the time the reach age 55 (presuming 5% growth on the fund). However, if they waited until they were age 35 before saving £7,000 per year into their pension, it would take just over 20 years of contributions (total contributions of £140,000) to achieve the same size pension pot. So, the earlier someone starts saving into a pension or other savings the better, as it gives more time for the money to grow, and it also benefits from the power of compounding over the individual’s working lifetime.
5. Understand payments on Student loans – Graduates will usually start repaying their student loan the April following the date they graduate or leave the course. However, when someone starts repaying the loanand how much they repay depends on their repayment plan, which can be checked in their student loan repayment account. Those who started their course between 1 Sept 2012 – 31 July 2023 are likely to be on Repayment Plan 2, meaning they will only start making repayments once their income is over the repayment threshold, which is currently £27,295 a year. Student loan repayments are collected via PAYE, with 9% of salary that exceeds the current threshold used to pay off the loan.

Loans will also be cancelled after a certain period of time if they’ve not already been paid off in full – this can vary between 25 and 40 years depending on the rules at the time the loan was taken out.  Some companies have student loan reimbursement schemes to help employees with their student loan repayments. The repayment amount does not depend on the level of the student loan, it is based purely on the amount earned. So those with £20,000 of debt will repay the same as those with £50,000 of debt if they earn the same amount.

6. Check out workplace perks – Many employers offer their staff various benefits, so it is important to know what is on offer. These can be anything from support with health and fitness, e.g. discounted gym memberships, health and fitness apps and devices, or discounts on shopping, support with childcare and elderly care costs and debt support. Some of these are offered through salary sacrifice which means it is paid through company payroll using pre-tax salary; meaning less income tax and National Insurance are paid which can offer significant savings.

Many employers also offer financial education seminars delivered by financial coaches to help when starting work right through to retirement planning, as well as access to Individual Savings Account (ISAs) and Share Schemes,  which can be used to help build financial resilience (see next tip).

7. Consider Savings – It’s always a good idea to have a pot of money for unexpected costs and for the future. Whilst a workplace pension provides a great way to save for retirement, there are also other options for those looking to save in general.

An ISA is a tax efficient savings option for those wanting to build future savings. There are several different types of ISA available, with the two most common being a ‘cash’ or a ‘stocks and shares’ ISA.  £20,000 can be saved per person each year into an ISA without having to pay tax on any savings interest or growth in the investments. Many workplaces offer their employees access to Workplace ISAs and contributions can conveniently be taken directly from pay.

Some companies also offer employees access to Save as You Earn (SAYE) (sometimes referred to as share save plans) as a way to invest in their future. These plans run for three or five year terms, and employees can save between £5 and £500 per month.  At the end of the plan’s term, if the share price has fallen, employees can receive all their savings back.  If the share price is higher than the fixed price agreed at the start of the plan, employees can use their savings to buy shares and realise any returns.

The Share Incentive Plan (SIP) is another popular type of share plan, enabling employees to purchase shares by making monthly contributions of between £10 and £150. Employers may also provide matching shares so that the employee can receive up to two additional shares for each share purchased. Some companies will also use the SIP to gift ‘free shares’ of up to £3,600 in any tax year to employees.

8. Create a monthly budget – It’s always a good idea to create a monthly budget so that people can understand what they can afford to spend and avoid getting into debt. This should include all income and outgoings such as fixed costs (i.e. mortgage or rent, council tax, energy and water and contracts for TV and broadband subscriptions) and then other costs such as supermarket shopping, days and nights out or clothes and makeup. Budgeting apps which integrate with bank accounts can be useful to build a budget in one place and give a clear overview of all accounts including savings and show all transactions in one place, as well as how spending compares to previous months. Through such apps, it is possible to set multiple budgets for groceries, eating out, entertainment etc, as well as setting savings and debt repayment goals.
9. Review spending – If spending is more than someone would like it to be, they may be able to reduce their costs by checking bank and payment services for recurring payments and look for ways to reduce these. This may be possible by shopping around to lower household bills such as insurance, phone and broadband providers, and cancelling unused subscriptions. Discount vouchers are also available online and many workplaces offer employee discount schemes, which can be useful for the weekly shop or big purchases, such as if a washing machine breaks, and also activities like eating out and holidays.
10. Understand good debt vs bad debt – Debt comes in many forms such as loans, credit cards or store cards. A mortgage is a form of ‘good debt’ which should be reviewed occasionally to ensure you have a good deal. However, at the opposite end of the spectrum, debt with high interest payments, such as payday loans and credit cards can get out of control if they are not repaid quickly.

Generally, many people may not realise the varying levels of interest that different debt providers charge.  Credit cards and overdrafts may have rates as high as 40%, with payday loans having rates of 1,500% and more! By shopping around, it may be possible to move to a lower interest rate, and some credit cards even offer 0% on balance transfers, for a period of time.

Research from WEALTH at work indicated that if workers were struggling with debt, only 9% would seek help from their employer. Particularly worrying was that 16–24 year-old workers were just as likely to seek help from a pay day loan company (13%) than their employer (12%)[2]. So, it’s important for anyone who is struggling with debt to know that there is support available from reputable sources. Many employers offer Employee Assistance Programmes (EAP) that includes debt management support. This support often ranges from budgeting advice to establishing the root cause of someone’s debt issues. Free services such as MoneyHelper, Citizens Advice or National Debt Line are also available.

Jonathan Watts-Lay, Director, WEALTH at work, comments,

“Starting a first job is an exciting time. For some, it can mean the first time they are having to manage their own money. It is important that young people are taught about budgeting, savings and responsible borrowing so they take control of their finances. Anyone starting a new job should speak to their employer to find out what benefits are available and sign up if they are offering financial education. It could be one of the best financial decisions they ever make.”

[1] https://www.wealthatwork.co.uk/corporate/2023/09/13/saving-1-more-could-boost-pension-by-25/

[2] https://www.wealthatwork.co.uk/corporate/2024/03/18/the-impact-of-money-worries/