Jennifer Adams looks at methods a business may be able to help pay for school or university fees. Which strategy is preferable will depend on whether the recipient is an employee or a child of a shareholder/director, the age of the child and overall tax saving.
Child owning shares and receiving dividends
A child can hold shares at any age, the dividends being held within a bare trust rather than allocated directly. If the child is under 18 years and the shares are not purchased out of funds already held by the child, the cash donor should not be the parent. Gifts in excess of £100 between a parent and beneficiary create a bare trust with the income being taxable on the parent.
If the child is not a shareholder, the following strategies are possible for employees whether the business is a sole trader or company.
Employing the child
The most straightforward strategy is for the business to pay and contract with the tuition provider direct, if they are happy to do so. The payment is tax deductible, but taxable as a benefit-in-kind (BIK) on the employee/child. The employee pays tax on the BIK rather than paying the full amount out of net pay; there will be no employee's National Insurance contributions (NICs). The company will be liable for Class 1 NICs but that amount will also be tax deductible.
By contrast, if the company pays fees without contracting with the provider, payments go through the PAYE system as additional salary for the employee, being tax and NICable for both employee and employer.
Salary sacrifice
A business may be able to approach the provider for a group discount should several children be involved (probably only possible for preschool) and use a 'salary sacrifice scheme' for payment. Such schemes enable employees to give up some of their salary and receive a BIK in return. The taxable amount is the higher of any cash alternative or salary foregone or the taxable benefit calculated under the normal principles. If a discount is possible then the benefit is in the employee paying lower income tax and NICs on their reduced pay.
Loan to employee
An employer may offer a loan to their employees. A loan agreement must be drawn up, with interest and repayment details. An employee can receive loans up to £10,000 before tax charges apply, the only cost to the employee would be the interest payable. This method is particularly useful to retain valued staff, or if the employee is a family member. If the employer waives the loan PAYE income tax and Class 1 NICs liabilities arise on the amount released or written off.
Employer scholarship scheme
Employers can pay tax and NICs-free scholarships or expenses of up to £15,480 a year to an employee in full-time higher education so long as the scholarship is fortuitous. A scholarship is 'fortuitous' if it would have gone to that person even if their family member did not work for the business. A trust fund or a scheme must be set up and less than 25% of payments made must be for employment-linked scholarships.
Unfortunately, such schemes cannot be applied to a director's children because the tax legislation deems such payments to be a BIK. However, in some circumstances a remoter relative (e.g., a grandparent) could establish a scheme provided the student was validly employed and their parents not involved with the company.
Practical tip
The benefit of paying school or university fees from company funds may produce too high a tax bill for the director/shareholder/parent. For the director not to have a taxable benefit if the company pays for the course, it needs to fall within the work-related training exemption, which will be difficult to argue for non-MBA courses.
