Tax breaks for work-related training

Exemption for learning or training

Tucked away in the dusty pages of the tax legislation is an exemption which says that “No liability to income tax arises in respect of income from a scholarship held by an individual in full-time education at a university, college, school or other educational establishment.” HMRC gives the term scholarship a wide meaning. It has long accepted the exemption covers payments by an employer for an employee’s training-related costs where they meet the conditions of the exemption.

The payments are only exempt if they are for the costs of the employee’s training/education. Payments that are really a reward for employment with your business are taxable as earnings, i.e. they are treated as salary for tax and NI purposes.

Because a scholarship payment is not earnings there’s no liability to NI contributions for employers or employees.

Purpose of payment

The scholarship payments can be used to cover accommodation, living costs, etc. that are incurred by the employee because of their attendance at college etc., as well as tuition fees. A fairly ancient, but still relevant, HMRC statement sets a limit on the amount which can be paid before it scrutinises the arrangement. This prevents employers paying disproportionate amounts to an employee to compensate for low earnings while working for the employer, say in between terms.

Tax free

HMRC’s statement says that as an employer you can pay an employee up to £15,480 tax free for periods where they are undergoing training at an “educational establishment”, e.g. college, university or other public educational institution. The £15,480 can be reimbursed tax and NI free to your employee or you can pay the expenses on their behalf. If you pay more than the limit it might still be exempt but HMRC may make enquiries into how the level of payment was arrived at. If it decides it’s excessive the whole amount may be taxable.

Conditions of the exemption

The exemption applies only where the:

• training/education course is for a period of at least one year
• employee attends the course for at least 20 weeks during each academic year that the training lasts, i.e. from 1 September to the following 31 August.

There’s nothing in the rules of the exemption which prevents it from applying to payments made to a member of your family.

Tax deductible?

In our view the scholarship payment is a tax-deductible expense from your profits as long as it’s wholly and exclusively for the purpose of the business. To back this up, using HMRC’s own words, “the disallowance of expenditure by an employer on staff training and development will be extremely unusual indeed”.