CA2 Paper 1 April 2017

The question paper states that: "Repayments are deducted from salary before making any allowance for taxes or other charges on income"

However, the model does not deduct these repayments from salary in the solution meaning that the salary increases by the annual salary growth after university of 5%. I included the repayments in the end of year salary position, which meant that the loan for student A was repaid in 28 years since university, as opposed to 18 years in the examiner's solution.(This increase makes sense).

Can someone shed light on why the repayments occurring in a particular year should not be deducted from salary earned in that year?

 

Hi Sean,

I did this paper as my actual exam, so I had a quick look at what I did.

I think the quote above is referring to the fact that the loan repayments are calculated based on salary gross of tax.

e.g. If you're being paid a gross salary of £20,000, the loan repayment will be (£20,000 - trigger salary)*10%.

Your annual gross salary doesn't change when you make a loan repayment...
so the gross salary will increase by 5% so that in the following year it will be £21,000.

Your post above suggests that the salary of the person would reduce when they make a repayment. I don't think that makes sense. If you have a salary of £30,000 (say) and you have a loan repayment that year of £1,000 (say), that doesn't mean your annual salary review at your company would be a percentage of £29,000 - it would be a percentage of your annual salary of £30,000!

I hope that helps...

 

Hi Satya,

Yes this clears it up, I think the wording of the line above threw me off... I couldn't do the same methodology for B as the loan would never have been repaid so would have figured out my interpretation was wrong.

Thanks again