Using The Business To Pay For School And University Fees

 

The focus in this article is on an owner-managed company paying for school and university fees. By contrast, a sole trader would be paying fees from after-tax income, as would partners – however both could have employees who may benefit from the strategies.

School fees at primary school level can range from £11,000 (day school) to £20,000 (boarding school) and at senior school from £12,500 (day school) to over £34,000 (boarding school) per annum. A lifetime of privately-funded education could cost in excess of £500,000, and that’s before university fees are applied. Typically, a university student will pay £9,000 for tuition and require around £15,000 per annum for accommodation and food a year. These costs often have to be paid when the parents of the student are close to retirement and require funds themselves for later life.

 

Where third parties can fund education costs, the savings to the student and his or her parents can be significant. If the parent is a 40% taxpayer, then paying £15,000 worth of fees will actually cost £25,000 after tax is paid. 

 

A company or employer can help in a number of ways:

 

1. As part of a remuneration package – the employer pays the education fees and the employee pays tax and NICs on the payments made. If a 40% taxpayer, in this way the fees are covered and the cost to the employee is around 50%. It may be much less if a 20% taxpayer; however, the fees are added to income to determine the tax rate.
2. Salary sacrifice – part of salary is sacrificed for education fees. The employer does not pay more, and you receive less income.
3. Employer scholarship scheme – a scheme can be set up by the employer to pay education fees. This can be tax effective, but must apply to all employees. Usually payments should be discretionary for tax purposes. 25% or less of the payments made from the trust fund in the year of assessment should be scholarship payments provided as a result of employment for no benefits-in-kind tax to apply (See ITEPA 2003, ss 211-215). Employers can pay bursaries and scholarships, but the construction of the scheme is important for tax benefits (mostly tax-free in the hands of the scholar, possibly taxable in the hands of the parent employee).
4. Employer childcare schemes – these are usually for much younger children but can be used for private education. Children up to the age of 15 (or if disabled, 16) may benefit where employers offer employees up to an extra £55 per week for child care, tax and NIC free. There are also childcare voucher and government schemes available for younger children.
5. Child owning shares – the child could purchase shares in the company. The child, a taxpayer in his own right, can receive dividends to help pay for education fees. A grandparent could give the child cash to buy shares. The cash donor should not be the parent; otherwise the parent could be taxable on the dividends, not the child (ITTOIA 2005, s 629). The child as a taxpayer has the first £10,600 of income tax–free, and will also qualify for the new £5,000 ‘dividend nil rate’ from April 2016.
6. Employing the child – the child could be employed full-time (after completing A levels). The child could then attend a full-time university or technical college, and up to £15,480 per annum can be paid to the child tax and NIC free by the business (see ITTOIA 2005, s 776 and SP 4/86).
7. Employee loans – as part of an education fees subsidy plan, the employer might make a loan to pay fees and also to pay the interest payments on the loan. The cost to the employee is only a tax charge on interest arising. However, the employee can have beneficial loans up to £10,000 before tax charges apply.  The loan itself can later be written off (and a tax charge applied) or paid off by the employee.
8. Director’s loan account – where the director/parent has a loan account credit balance with the company, this is his money. The parent could use some of those funds to pay education fees, or charge the company a commercial rate of interest on the loan account balance to help in doing so (although the interest will be taxable in the director’s hands). 

 

Explore the different options in paying education fees from the business – some could be tax-efficient. Expert advice may be required.