Can Your Business Pay School or University Fees? A UK Tax Guide for Company Owners

For many owner-managed businesses, it can be tempting to use company funds to pay for a child’s school or university fees, particularly when the company has extra cash available.

However, using business money for education expenses can trigger tax liabilities for both the company and the individual. Before taking this route, it’s important to understand how HMRC treats these payments and what options might be more tax-efficient.

Below are the key considerations.

Reimbursing Education Fees Through the Company

If a business owner pays the education fees personally and later asks the company to reimburse the amount, the payment is treated as employment income.

This means the reimbursement becomes subject to:

• PAYE income tax

• Employee Class 1 National Insurance

• Employer Class 1 National Insurance

Because both income tax and National Insurance apply, reimbursement is typically the least tax-efficient method of covering education costs through a business.

Corporation Tax Treatment for the Company

When a company pays for a course taken by an employee or director, the expense is only allowable for corporation tax relief if it is incurred “wholly and exclusively” for business purposes.

School or university tuition generally does not meet this requirement, as it is considered a personal expense rather than a business cost. As a result, payments made directly to an educational institution are usually not tax deductible for the company.

Direct Payment and Benefit in Kind (BIK)

A more straightforward approach is for the company to pay the school or university directly.

In this case:

• The employee or director receives a Benefit in Kind (BIK).

• The company must pay Class 1A National Insurance.

• The employee does not pay employee NIC on the benefit.

The Class 1A NIC paid by the company is deductible for corporation tax, making this option slightly more efficient than paying extra salary to cover the fees.

However, for higher-rate taxpayers, the corporation tax deduction rarely offsets the combined income tax and NIC exposure.

Using a Company Loan to Pay Tuition Fees

Another option is for the employer to provide a loan to the employee to cover education costs.

A proper loan agreement should be prepared, including:

• Interest rate

• Repayment schedule

• Formal documentation

When the Loan Is Under £10,000

If the total outstanding loan balance stays below £10,000 during the tax year, there is no taxable benefit for the employee, even if the loan is interest-free or offered at a low interest rate.

When the Loan Exceeds £10,000

If the loan amount goes above £10,000, HMRC treats the difference between the interest charged and the official interest rate (currently 3.75%) as a taxable benefit.

Since the official rate can change, the taxable benefit may vary from year to year.

What Happens if the Loan Is Written Off

A company loan can defer tax rather than eliminate it.

If the employer later writes off the loan, the amount is treated as earnings. This results in:

• Income tax liability

• Class 1 National Insurance

NIC is processed through PAYE, while the income tax is reported on the employee’s Form P11D, requiring the employee to submit a Self-Assessment tax return.

Dividend Planning and the Settlements Rules

Another possible strategy involves giving shares to a child, allowing dividends to fund future education costs.

Children can legally own shares at any age, although dividends are normally held in a bare trust until age 18.

However, the settlements legislation can restrict this strategy.

If a parent gives shares or investment funds to their child and the income generated exceeds £100 per year, the income is taxed as the parent’s income, not the child’s.

To avoid this issue, the funds would need to come from someone other than a parent, such as a grandparent.

This approach works better as long-term financial planning for future fees, rather than a quick way to access funds.

Salary Sacrifice: Limited Tax Advantage

In the past, salary sacrifice arrangements could sometimes reduce the cost of certain benefits.

However, under current tax rules, salary sacrifice generally does not provide meaningful tax savings for school fees.

The taxable value of the benefit is calculated as the higher of:

• The salary given up, or

• The value of the benefit received

Any additional amount is still treated as taxable earnings.

Potential Savings Through Group Arrangements

One area where savings might be possible is through commercial arrangements rather than tax planning.

For example, an employer might negotiate a group discount with a nursery or education provider if several employees’ children attend the same institution.

While this does not remove tax, it could reduce the overall cost of education fees.

Final Thoughts: Choosing the Right Approach

There is no single tax-free way for a business to pay school or university fees. Each method comes with different tax and National Insurance implications.

Before implementing any arrangement, it is essential to calculate the total tax impact for both the company and the individual. Professional advice can help determine the most efficient option based on your circumstances.

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