Students

A provision in the recent Budget means that your company can pay for your offspring’s further education. Is there any truth in it?

Expenses

If you wanted to fund your child’s further education you would most likely draw the money out of your company, however this will probably result in a tax bill for yourself and perhaps even your company. Wouldn’t it be great if your company would pay them instead of you and somehow claim this as a tax-deductible expense?

Employers can already pay a tax-free scholarship or expenses of up to £7,000 per year to staff who attend full time university or technical college courses (see s.331 Income and Corporation Taxes Act 1988). This can cover various things such as rent, travelling expenses and subsistence, but not tuition fees. There are plenty of student loan companies for that.

In the March 2005 budget it was announced that this level of tax-free expenses would be raised to £15,000 in September 2005. The payment will also be free from NI for all workers and not just trainees as before.

However…

The taxman won’t allow parents to save tax by getting their employers to pay scholarships to their children (unless paid into a special trust fund). An employer is deemed to receive the benefit of scholarship or maintenance expenses paid by their employer to a member of their family of household under s.212 Income Tax (Employment and Pensions) Act 2003. So you’d get taxed on a benefit-in-kind and the company would pay employers’ NI (12.8%) on top.

Solution

When looking closer into the subject it appears that grandparents, aunts, uncles and godparents are not taxed on the child’s scholarship income. Providing the child doesn’t live with you or dependant upon you then your company can pay a tax-free scholarship of up to £7,000 per year, rising to £15,000 in September.
If you decide to do this get the student to complete regular itemised expense claims to support the amounts paid to the company.

Rules

The student has to be an employee of the company that is paying the scholarship and have been working there from three months to a year (their gap year is a favourite). The student’s employment contract should also state that employment will continue while attending college.

The course that the student takes must be a full-time course at a recognised educational establishment, and the student must attend for at least 20 weeks per academic year. Something worth noting is that a student doesn’t have to study something relevant to the job, i.e. if the student was working as an accountant, he/she could study computing and still get the scholarship.