02 Nov Educational scholarships for Employees or their families
Special tax rules apply to scholarships, which include exhibitions, bursaries or other similar education endowments.
Provided certain conditions are met, there will be no tax or reporting implications where an employer funds a ‘fortuitous’ scholarship for an employee’s family member. Broadly, this means that there must be no direct connection between the employee working for the employer and their family member getting the scholarship.
A scholarship is ‘fortuitous’ if all the following apply:
- the person with the scholarship is in full-time education
- the scholarship would still have gone to that person even if their family member did not work for the employer
- the scholarship is run from a trust fund or under a scheme
- 25% or fewer of the payments made by the fund or scheme are for employment-linked scholarships
If the scholarship does not qualify for exemption, the employer must report it to HMRC on form P11D and pay Class 1A NICs on the cost of providing it.
Unfortunately, in a family company, directors’ children are unable to take advantage of this provision because the tax legislation deems there to be a benefit in kind. However, in some circumstances a remoter relative (for example a grandparent) could establish such a scheme provided that the student was validly employed and their parents are not involved with the company.
An employee in full-time employment may leave that employment for a period to attend an educational establishment but continue to receive payments from their employer, for example where the employee is on a ‘sandwich’ course. Such payments will be treated as exempt from income tax, provided the following conditions are satisfied:
- The employer must require the employee to be enrolled at the educational establishment for at least one academic year and to attend the course for at least 20 weeks in that academic year. If the course is longer, the employee must attend for at least 20 weeks on average, in an academic year over the period of the course.
- The establishment must be a recognised university, technical college or ‘similar educational establishment’, open to the public and offering more than one course of practical or academic instruction.
- The payments must not exceed a specified maximum figure for the academic year. This figure must include lodging, subsistence and travel allowances but does not include any tuition fees payable to the establishment by the employee. Note that:
- the exemption can apply to payments of earnings payable to the student for periods spent studying at the educational establishment
- it cannot, however, cover payments made for any periods spent working for the employer, whether during vacations or otherwise
- the current maximum figure is £15,480 per academic year
- in principle, the limit is all or nothing: if it is breached then the whole amount is taxable. However, if an increased payment is made during the academic year then this does not invalidate earlier payments made within the agreed limit
Qualifying payments will also be exempt for Class 1 National Insurance Contributions purposes.
Jack’s employer pays for him to attend college on a course that starts in September 2018 and finishes at the end of the academic year in June 2019. Jack works for his employer over the Christmas and Easter periods, during which he is paid his normal monthly salary. His income while working during holidays will be subject to tax and Class 1 NICs, because the exemption only applies to income when attending college.
Jack’s employer pays him £3,000 in September 2018 for the first term of the academic year followed by two further payments of £3,000 each in January 2 and April 2019 to cover terms 2 and 3. These three amounts of £3,000 each will be exempt from tax and NICs because they meet the qualifying conditions, including being less than the financial ceiling of £15,480.
Partner note: ITEPA 2003, s 204, ss 211 – 215; ITTOIA 2005, s 776(1); SP 4/86