Paying School Fees Through Your Limited Company: The Tax Reality.

Can My Company Pay School Fees? A Tax Guide

With the cost of private education rising, many business owners naturally ask: “Can I pay my children’s school fees through my limited company?” While technically possible, doing so directly is rarely tax-efficient and often results in a higher tax bill than paying personally.

HMRC has strict anti-avoidance rules, specifically the Settlements Legislation, designed to prevent parents from diverting income to their minor children to use their tax-free allowances. Paying fees directly usually triggers a Benefit in Kind (BIK) charge or is treated as additional salary, attracting both Income Tax and National Insurance.

However, legitimate strategies exist, such as utilising grandparent trusts or Family Investment Companies, that can help structure your family wealth to fund education efficiently.

Why Direct Payment Schemes Often Fail

Simply having your company pay the school invoice is treated by HMRC as the director settling a personal pecuniary liability. This leads to significant tax charges.

Salary/Bonus Treatment

The payment is taxed as income, subject to Income Tax and Employee/Employer NICs. This is rarely efficient compared to taking a dividend.

Benefit in Kind

If structured as a benefit, the company pays Class 1A NICs (15% or current rate), and the director pays Income Tax on the value of the fees paid.

Spotlight 62 Warning

HMRC has recently targeted aggressive tax avoidance schemes that use “dividend diversion” to minor children via special share classes. These schemes are high-risk and often fail, leading to penalties and back-taxes.

Legitimate Alternatives: Grandparents & Structures

The key to safe tax planning is ensuring the parents are not the “settlors” of the funds used for the child’s benefit.

1. Grandparent Trusts

If grandparents have surplus capital, they can set up a Discretionary Trust or Bare Trust for the grandchildren. Unlike parents, grandparents are not subject to the parental settlement rules. Income generated by the trust is taxed on the child or the trust, often utilising the child’s Personal Allowance and Dividend Allowance. This can also be effective for Inheritance Tax planning.

2. Family Investment Companies (FIC)

For families with significant capital, a Family Investment Company can be established. Grandparents can fund the company, and different share classes can be used to pay dividends to a trust for the children’s education. This offers control over assets and potential tax efficiency but requires specialist setup.

3. Pension Lump Sums

Grandparents over the age of 55 may access their 25% tax-free pension lump sum to pay for school fees. This provides a tax-free source of capital without affecting their other taxable income.

Other Funding Options

If grandparent funding isn’t an option, there are other financial avenues to explore, though they carry their own risks.

Mortgage Re-financing

Borrowing against property equity can release capital, though interest rates must be considered carefully against the cost of school fees inflation.

Tax-Efficient Investments

Using ISA allowances or investing in Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS), which offer upfront Income Tax relief (30-50%) that can be used to offset the cost of fees. Note: VCTs and EIS are high-risk investments and you should review EIS Deferral Relief rules.

Q1: Can I employ my child to pay for school fees?

Only if they genuinely work. You can employ a child from age 13 for real work (e.g., light office tasks), but the salary must be commercially justifiable and follow child employment laws. Paying a “sham” salary just to cover fees is tax evasion.

Q2: What is the “Settlements Legislation”?

It is a set of anti-avoidance rules (ITTOIA 2005) that prevents high-earners from shifting their tax liability to people with lower tax rates (like their spouses or minor children) by diverting income. It ensures parents cannot use their child’s tax-free allowance for their own benefit.

Q3: Can I borrow from the company to pay fees?

Yes, via a Directors Loan Account. However, if the loan exceeds £10,000, it triggers a Benefit in Kind tax charge. Furthermore, if the loan is not repaid within 9 months of the year-end, the company pays S.455 tax (33.75%).