If you run your own limited company, you might wonder whether the business could help pay for school or university fees.
At first glance, this can seem like a sensible option, especially if the company has surplus cash available. However, the tax rules mean it’s rarely as straightforward as it appears.
In many cases, there can be income tax and National Insurance implications for the individual receiving the benefit.
Let’s look at the main options and what to consider.
Can the Company Reimburse You for the Fees?
One option is for the company to reimburse you for the cost of education fees.
However, this is generally the least tax-efficient approach.
If the company reimburses you, the payment is treated as earnings. This means it will be subject to:
- PAYE income tax
- Employee National Insurance
- Employer National Insurance
Because of this, reimbursement often results in higher overall tax and NIC costs.
Is the Cost Tax Deductible for the Company?
For a company to claim a tax deduction on an expense, it must be incurred “wholly and exclusively” for business purposes.
School or university fees will rarely meet this test.
If the company pays an educational institution directly, HMRC will generally treat the payment as not being for business purposes, meaning the company cannot claim corporation tax relief on the cost.
What Happens If the Company Pays the Fees Directly?
A more common approach is for the company to pay the school or university directly.
In this case, the payment is treated as a Benefit in Kind (BIK).
This means:
- The employee or director pays income tax on the value of the benefit
- The company pays Class 1A National Insurance
- No employee NIC is payable
Because Class 1A NIC is corporation tax deductible, this route can sometimes be slightly more efficient than paying extra salary.
However, for higher-rate taxpayers, the tax cost can still be significant.
Could the Company Provide a Loan Instead?
Another option is for the company to lend the money to the employee or director to cover tuition fees.
To do this properly, there should be a formal loan agreement, including:
- Interest terms
- Repayment terms
If the total amount borrowed does not exceed £10,000 at any point during the tax year, there is usually no taxable benefit, even if the loan is interest-free.
If the loan exceeds £10,000, a taxable benefit may arise. This is calculated based on the difference between the interest charged and HMRC’s official interest rate (currently 3.75%, although this can change).
What Happens If the Loan Is Written Off?
If the loan is later written off or released, the amount is treated as earnings.
This means it becomes subject to:
- Income tax
- Class 1 National Insurance
The NIC is collected through PAYE, while the income tax is reported on Form P11D, meaning the individual may need to submit a Self Assessment tax return.
So while a loan can delay the tax charge, it doesn’t remove it entirely.
Could Dividends Help Fund School Fees?
In theory, dividends could be used if a child owns shares in the company.
Children can legally hold shares, although dividends are usually held in trust until they turn 18.
However, the settlements legislation can make this difficult.
If a parent provides funds or shares to a child and the income generated exceeds £100 per year, HMRC will usually treat that income as belonging to the parent for tax purposes.
This means the tax advantage disappears.
In some cases, the rules may work differently if the funds are provided by another family member, such as a grandparent.
What About Salary Sacrifice?
In the past, salary sacrifice arrangements were sometimes used to help fund education costs.
However, the tax rules have changed.
Now, the taxable benefit is based on the higher of the salary given up or the value of the benefit.
This means salary sacrifice generally does not produce significant tax savings for school fees.
Any potential benefit would usually come from commercial arrangements, such as an employer negotiating a group discount with an education provider.
Final Thoughts
Using a company to fund school or university fees can be tempting, but the tax rules mean it’s rarely a simple solution.
Each option can have different tax and National Insurance consequences, and the most suitable approach will depend on your personal and company circumstances.
Before making a decision, it’s important to calculate the overall tax position carefully.
Need Advice on Extracting Money from Your Business?
If you run an owner-managed business and want to explore the most tax-efficient ways to use company funds, we’re here to help.
At Jon Davies Accountants, we help business owners understand their options and make informed financial decisions.
Get in touch with Jon or the team today if you’d like to discuss the best approach for your situation.
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