First job money guide: the decisions that matter most in your 20s
Starting your first job is the single most financially significant moment in your life — not because of how much you earn, but because of how much time you have. The decisions you make in the first year or two of working can have a bigger impact on your long-term wealth than almost anything you do in your 40s.
Most people starting work don't get told any of this. This guide covers the things that actually matter — in the order that actually matters.
Time is your most valuable financial asset. £200 invested at 22 is worth more than £200 invested at 40 — not slightly more, but roughly three times more by retirement, assuming average market returns. The decisions you make now have compounding benefits that stretch over four decades.
Understanding your first payslip
Your gross pay is what your contract says. Your take-home pay will be noticeably lower. Here's what's being deducted:
| Deduction | What it is | Typical rate at entry-level salary |
|---|---|---|
| Income tax | Tax on earnings above the personal allowance (£12,570) | 20% on earnings above £12,570 (England/Wales). Scotland has six bands — most entry-level salaries fall in the 19%–21% range. |
| National Insurance | Contribution to state pension and NHS | 8% on earnings between £12,570–£50,270 |
| Pension contribution | Auto-enrolment into workplace scheme | Usually 5% employee (with 3% employer) |
| Student loan repayment | If applicable — based on income above threshold | 9% of income above £29,385 (Plan 2) |
At a salary of £26,000, a typical first-year graduate take-home is around £1,760/month after tax, NI, and pension — before student loan deductions. If you have a Plan 2 student loan, you won't make repayments at that salary — the 2026/27 threshold is £29,385, well above a £26,000 salary.
Auto-enrolment: don't opt out
By law, your employer must automatically enrol you into a workplace pension if you're over 22 and earning above £10,000/year. The minimum contributions are 5% from you and 3% from your employer — a total of 8% of your qualifying earnings.
The employer contribution is effectively free money. If you opt out to get more take-home pay, you're turning down a 3% pay rise. At a salary of £26,000, that's around £600/year in employer contributions you're walking away from — plus the investment growth on it over the next 40 years.
Retirement feels abstract when you're 22. But the pension contributions you make in your 20s are the most powerful of your career because they have the longest time to compound. £1 contributed at 22 could be worth £7+ at 65 in real terms (assuming 5% real return). The same £1 contributed at 45 might be worth £2.50.
Build an emergency fund first
Before anything else — before extra pension, before investing, before paying off student debt — build a cash buffer of three months' essential expenses.
This is boring advice. It's also the most important. Without an emergency fund, any unexpected cost (car repair, medical bill, job loss) goes onto a credit card and potentially into high-interest debt. High-interest debt is the single most expensive thing in personal finance, and it undoes everything else you're trying to do.
Three months' expenses in an easy-access savings account earning 4–5% is the right starting point. Not an ISA, not investments — cash, accessible, boring.
ISA or pension — which comes first?
Once you have your emergency fund, this is the question most people in their 20s wrestle with.
The short answer: pension first, up to the employer match. Then ISA for medium-term goals. Then more pension for long-term goals.
| Goal | Best vehicle | Why |
|---|---|---|
| House deposit (next 3–7 years) | Cash ISA or Stocks & Shares ISA | You need access — pension locks money away until 57+ |
| Retirement (35+ years away) | Pension | Tax relief gives you an instant return on every contribution |
| First home (Lifetime ISA) | LISA | 25% government bonus on up to £4,000/year — hard to beat |
| General long-term wealth | Stocks & Shares ISA then pension | ISA gives more flexibility; pension gives more tax relief |
The Lifetime ISA deserves special attention for first-time buyers. You can put in up to £4,000/year and the government adds 25% — up to £1,000/year in free money. You must open one before age 40, and it must be used for a first home purchase (on properties up to £450,000) or held until 60. The penalty for withdrawing for other reasons is steep.
Priya was contributing 5% to her workplace pension (with 3% employer match) but had no emergency fund and was worried about her student loan. She was considering opting out of the pension to free up cash.
After mapping her income and outgoings, she realised she could save £250/month if she cut two subscriptions and reduced eating out. Her plan: £150/month to an easy-access savings account until she had three months' expenses (about £4,500), then redirect that £150 to a Lifetime ISA for a future house deposit.
She kept her pension contributions at 5% — protecting the employer 3% match — and set a reminder to review in two years when she expected a salary increase. She didn't touch the student loan; at 6.25% interest on a Plan 2 loan, the balance writes off after 30 years regardless, and the repayment is income-contingent — it just disappears from her payslip if she earns below the threshold.
The truth about student loans
This might be the biggest source of anxiety for people starting work — and also the most misunderstood.
UK student loans are not like normal debts. You repay a fixed percentage of income above a threshold — nothing if you earn below it. The remaining balance is written off after 25–40 years depending on your plan. The "interest rate" is largely irrelevant because most graduates won't repay the full balance before write-off.
What this means practically: don't make voluntary overpayments on a student loan unless you have very high earnings and are certain you'll repay the full balance. For most graduates, extra money is better directed toward an ISA, pension, or emergency fund than voluntarily accelerating student loan repayment.
Four actions to take in your first year
- Don't opt out of your workplace pension. At minimum, contribute enough to get the full employer match. This is the highest-return financial decision available to you.
- Open a separate easy-access savings account for your emergency fund. Target three months of essential expenses. Keep this in cash — not investments.
- Open a Lifetime ISA if you don't own a home. You must open one before 40. Put in £1 to get it open, then fund it when you can. The 25% government bonus on up to £4,000/year is significant.
- Leave your student loan alone. Unless you're on a very high salary, voluntary overpayments are rarely the optimal use of spare money. The income-contingent nature of repayment makes it very different from a mortgage or credit card debt.