Company directors may be interested in finding tax-efficient ways to pay for their children’s school fees through their company. While there are a few potential methods to achieve this, it’s essential to understand the restrictions and potential drawbacks associated with each approach. This article will explore the direct payment of school fees by the company, tax-efficient alternatives, and important considerations to keep in mind.

Direct Payment by the Company

1. Benefit in Kind (BIK): When a company directly pays for an employee’s child’s school fees, including those of a director, the payment is considered a benefit in kind (BIK). The value of the school fees paid will be added to the employee’s income, and they will be required to pay income tax on this additional amount. It’s important to note that the company will also be liable for Class 1A National Insurance contributions on the value of the benefit provided.The BIK rules ensure that employees are taxed on the full value of their remuneration package, including any non-cash benefits they receive. By treating the school fees as a BIK, the government ensures that the employee is paying the appropriate amount of tax on this benefit.
2. Corporation Tax: In some cases, a company may attempt to deduct the cost of school fees as a business expense to reduce its taxable profits. However, this deduction is only allowable if the expense is incurred wholly and exclusively for the purposes of the trade. In most situations, it is unlikely that school fees meet this criterion. As a result, the company cannot typically claim a corporation tax deduction for the school fees paid on behalf of an employee or director. This means that the company will not be able to reduce its taxable profits by the amount of the school fees, and it will need to pay corporation tax on its full profits, including the amount spent on school fees.

Tax-Efficient Alternatives

While directly paying school fees through the company may not be tax-efficient, there are some alternative methods that company directors can explore to reduce the tax burden associated with paying for their children’s education.

Salary Sacrifice: One option is for the employee to enter into a salary sacrifice arrangement with the company. Under this arrangement, the employee agrees to reduce their salary in exchange for the company paying the school fees on their behalf. However, it’s crucial to understand that this approach does not offer a tax advantage, as the fees paid are still considered taxable earnings. The salary sacrifice arrangement works by reducing the employee’s gross salary, which in turn reduces their income tax and National Insurance contributions. The company then uses the amount of the salary reduction to pay the school fees directly. While this may result in a lower tax bill for the employee, the school fees are still ultimately treated as part of their taxable earnings.

Dividend Payment: If the employee is also a shareholder in the company, another option to consider is for the company to pay dividends to the shareholder, which they can then use to pay the school fees. Dividends are typically taxed at lower rates than salary, making this a potentially more tax-efficient approach.

However, there are a few conditions that must be met for this method to be viable. First, the company must have sufficient distributable reserves to pay the dividends. These reserves are the company’s accumulated profits that are available for distribution to shareholders. Second, the shareholder must have a sufficient dividend allowance to receive the dividends without incurring additional tax liability.

It’s important to note that the taxation of dividends has undergone changes in recent years, with the introduction of the dividend allowance and changes to the tax rates applied to dividend income. As a result, it’s crucial to carefully consider the tax implications and seek professional advice before pursuing this option.

Family Trust: Another potential tax-efficient alternative is to establish a family trust to pay for school fees. A trust is a legal arrangement where assets (such as money or investments) are held by trustees for the benefit of one or more beneficiaries. In the context of paying school fees, the company could make contributions to the trust, which the trustees could then use to pay the school fees for the director’s children.

Setting up and managing a family trust can be complex and costly, so it’s essential to seek professional advice to ensure that it is structured correctly and complies with all relevant tax laws and regulations. Trust income may be subject to tax, but if managed correctly, it can be a tax-efficient way to pay for school fees.

One of the main advantages of using a family trust is that it can provide a degree of asset protection and help ensure that the funds are used for their intended purpose (e.g., paying school fees). The trust can also be structured to provide flexibility in terms of who can benefit from the trust’s income and capital, which can be useful for tax planning purposes.

Considerations When exploring ways to pay for school fees through a company, there are a few additional considerations to keep in mind:

1. Gift from Company to Employee: If the company were to make a direct gift to the employee to pay for school fees, this would be treated as earnings and subject to income tax and National Insurance contributions. This is because the gift would be considered a form of remuneration, and the employee would be taxed on the value of the gift as if it were salary.
2. Loans to Directors: Another option that a company could consider is providing a loan to a director, which they could then use to pay school fees. However, if the loan exceeds £10,000, it will be considered a beneficial loan and subject to tax on the benefit. The company may also be liable for s455 tax, which is a tax charge on outstanding loans to participators (including directors) in a close company.

If the loan is not repaid within a certain timeframe (typically nine months after the end of the accounting period in which the loan was made), the company will be required to pay s455 tax at a rate of 32.5% on the outstanding loan balance. This tax can be reclaimed once the loan is repaid, but it is an additional cash flow consideration for the company.

Paying children’s school fees directly through a company in the UK is generally not tax-efficient due to benefit-in-kind rules. Alternative methods like paying dividends or using a family trust are available, but they come with complexities. Professional advice from a tax advisor or accountant is recommended to ensure compliance with tax laws and regulations. Understanding available options and seeking expert advice helps company directors make informed, tax-efficient decisions regarding paying for their children’s school fees through their company.