Paying for education
With colleges and universities now charging fees, there’s a good chance you’ll have to pay even more for your children’s education. But if your company pays these fees directly, can you avoid tax and NI on them?
Company pays fees
General rule. When the company picks up the bill for something you’d normally pay yourself, such as your child’s school or university fees, you’re likely to be taxed on that expense, but you may avoid a National Insurance (NI) charge.
Your liability. If the contract is between you and the school/university, it’s you that’s liable to pay the fees. So if the company pays them on your behalf, it is simply meeting your liability under that contract. Where this happens, the fees are treated just like a part-payment of your salary. The company must pay employers’ NI on the fees and you must pay tax and employees’ NI.
Company’s liability. However, the trick is to get the educational establishment to agree to contract directly with your company so that the company is liable to pay the fees under all circumstances. In this case, you can avoid paying employees’ NI - a saving of up to 11% of the cost of the fees.
Example. If you’re only taking the minimal salary to cover your personal allowance and the company pays school fees of £20,000 per year, you’ll save £2,200 (£20,000 x 11%) if the contract is between the school and the company. But, as a director found to his cost, it’s imperative that you can prove that the contract really is with the company and not you personally.
Who’s liable? In the case of Frost Skip Hire (Newcastle) Ltd v IRC SpC, 2004, the company had agreed with the school to pay the fees of the director’s son. Invoices for fees due were rendered to the company, which paid them. However, it was the parents, not the company, who signed the original forms that contained terms and conditions making them personally liable for the fees. There was no evidence of any renegotiation of contracts between the company and the school. So it was deemed that the company was meeting a liability of the parents and both employers’ and employees’ NI was due on the total fees paid.
Tip. Make sure all admission forms are signed by you as a director on behalf of the company and not by you as parent. If you’ve already signed such a form, get a new contract drawn up between the company and the educational establishment as soon as possible to indicate that it is the company, not you, that is liable for non-payment of fees.
Even if you get all the paperwork right so the contract is genuinely between the school/university and the company, you will still be taxed on the fees paid as a benefit-in-kind. The company is paying the school fees because you are its employee. This was shown in the case Glyn v CIR (Hong Kong), 1990. The company had agreed in the taxpayer’s contract of employment to pay his child’s boarding school fees while he worked in Hong Kong. The school fees were held to be part of the taxpayer’s total remuneration package.
Tip. If you’re a higher rate taxpayer, but your spouse also works for the company and pays basic rate tax, then consider including the school fees as part of their remuneration package. As long as you can justify the level of remuneration for work done, tax will be charged at just 22% rather than 40% - on £20,000 fees that’s a saving of £3,600 in tax (£20,000 x 18%).